a transfer of contract rights to a third party is an incidental benefit

third party beneficiary contract basics

Third Party Beneficiary of a Contract: The Basics

Introduction:

Contracts are binding obligations imposed upon the parties who have entered into the agreement. The law enforces the obligations if necessary and once a party executes the agreement it is an obligation imposed whether the party changes its mind or not. A party violating a contract is said to be in breach of contract and the other party may seek to obtain damages caused by the breach.

Contracts may be written or verbal (under particular circumstances) and the average person enters into dozens of contracts each year. Every time one purchases a good or service, subscribes to a publication, enrolls in a gym, employs a person, or is employed, or engages in business in any manner, one executes numerous contracts that are enforceable.

Contractual rights and obligations are so pervasive that few stop and consider how remarkable it is that one may force another to perform mutually agreed upon duties by use of the courts. As one client wrote, “If I sign on this line, X can force me into court, may seize my assets if I don’t pay a judgment, can force me out of business and into bankruptcy. All because I sign on that dotted line.” Yes.

While contracts are clearly normally binding upon the parties executing the contract, they can also be enforceable by third parties who have not executed the contract(s) (“third party”) under particular limited circumstances. In most instances, third parties can neither enforce nor defend a contractual obligation. They do not have “privity” to the contract and, as such, do not have rights or obligations since those apply only to the parties who executed the contracts.

But under particular circumstances a person or entity who did not sign the contract can enforce the obligations contained in the contract and that is the subject of this article.

The Basic Law:

Assignments versus Third Party Beneficiaries:

Parties can and do assign (transfer contractually) their rights under a contract though the right to assign may be limited by the contract itself. Thus, if you are obligated to provide X product at Y price to me and there is no restriction on assignment in the agreement, I can assign that right to another entity and that entity steps into my shoes and can enforce the agreement if necessary. As seen below, this is not the same as being a third-party beneficiary to a contract.

Third Party Beneficiary-The Requirements:

A third-party beneficiary, in the law of contracts, is a person who has the right to sue on a contract, despite not having originally been a party to the contract and/or a signer of the contract.

There are two kinds of third-party beneficiaries: an “intentional or intended” beneficiary and an “incidental” beneficiary .

When a non-party to a contract receives benefit from the agreement directly, this is known as an intentional beneficiary. Essentially, this means that contracts create rights, obligations, and liabilities only in the parties who negotiated and signed the contract. The third-party beneficiary must be referred to or named in the contract and the intent to provide a benefit to this third party must be irrevocable. (A typical example: a father pays tuition and enrolls his son in a college, signing the enrollment forms since his son is out of the country in the military. The son is the one mentioned as the student, but the father is the one paying and enrolling him. The father dies. The son returns. As a third party named beneficiary, the son can demand access to the school.) An intended beneficiary is explicitly promised certain benefits in a contract, but they are still not party to the contract itself.

An incidental beneficiary is a person or legal entity that is not party to a contract and becomes an unintended third-party beneficiary to the contract. An incidental beneficiary is a third party who benefits from a contract between two other parties, but it is not intended that the third-party benefit. This type of third party does not have any legal rights under the contract.

Categories of Intended Third Party Beneficiaries

A third-party beneficiary is either a donee or a creditor . A donee beneficiary benefits from a contract gratuitously, not in exchange for a service he/she/it has provided. For example, assume that you enter into a contract with Ed, a painter, providing that Ed will paint Uncle Pete’s home. Uncle Pete is not a party to the contract, but he is an intended third-party beneficiary who will gratuitously benefit from your contract with Ed.

A creditor beneficiary is a person to whom an obligation is owed by the promisee. In the previous example, imagine that you had paid Ed to paint the home. So, if Ed is painting to offset his own contractual obligation. Uncle Peter is therefore an intended third-party creditor beneficiary.

Contract Rights of an Intended Third-Party Beneficiary

Both donee and creditor beneficiaries can enforce contract rights, but to do so, both must be intended beneficiaries. The named beneficiary on a life insurance policy (the person who is to receive the death benefit upon the death of the insured) is a classic example of an intended beneficiary under the life insurance contract.

In general, an intended beneficiary is one who is:

1) Identified in the contract:

2) Receives performance directly from the promisor or circumstances demonstrate that the promisee will give the beneficiary the benefit from the contract.

Vesting of the Rights of the Third-Party Beneficiaries

For a third-party beneficiary to enforce a contract, her/his/its rights under the agreement must have vested , which means that the right must have actually come into existence. Thus, if the contract is breached before a condition precedent has been met, the right may not have vested. (You contract to supply product X but only if available from Y. Y does not make it available due to bankruptcy of Y. The right has not vested.)

Aside from the fact that the contract becomes enforceable by the third party upon vesting, the timing of the vesting is important for another reason. Before the third-party beneficiary’s rights vest, the original parties to a contract can modify their contract in any way they both wish. Once rights vest, the original parties cannot discharge or modify contractual rights without the beneficiary’s agreement to a change to the contractual rights.

A third-party beneficiary’s rights also vest if any of the following three things happen:

1) The beneficiary assents to the promise in a contract in the manner requested by the parties:

2) The beneficiary sues to enforce the contract’s promise; or

3) The beneficiary materially changes position in justifiable reliance on the contract’s promise.

As an example, assume Uncle Pete above cancels his own contract to have his house painted knowing you paid Ed to paint it. Or, assume Uncle Peter, upon hearing of the agreement, let you and Ed know he had canceled another painter since he wanted to have Ed do it. Because Uncle Pete has relied on Ed’s promise to you to his detriment, he is vested as a beneficiary. You can no longer let Ed out of the agreement without Uncle Pete’s consent.

It is vital to note that a third-party beneficiary is more than a mere outsider to a contractual arrangement. A third-party beneficiary is often a legally protected entity with rights who can enforce the agreement to which he/she/it is a beneficiary.

The Rights in the Contract Go to the Third-Party Beneficiary

When the third-party beneficiary has rights under the contract, those rights usually include all the rights that exist under the contractual document. For example, our office successfully argued in the California appellate courts that an arbitration clause in the contract could be enforced by the third-party beneficiary to the contract. The third-party beneficiary steps into the shoes of the party seeking to benefit the third party.

Conclusion:

It is vital for parties to a contract to understand that other entities or persons may be given rights but not obligations by their contracting. We once had a client who felt that the death of the other contracting party before our client’s construction company began to level a lot excused his company from performance only to find his company sued by the ex-wife of the deceased party who was a co-owner of the lot.

Our client complained bitterly that he had never even met the lady, would not have agreed to do anything for that “virago,” and that he only contracted with persons who he had met, checked out, and decided that they were “adult and reasonable.” “Not with that woman,” our client wrote.

But she sued as a third-party beneficiary and our client was bound.

One can provide in the agreement itself that no third-party beneficiaries are intended by the agreement and that all rights pertain only to the contracting parties. That simple solution was never even considered by our client. But you may be sure that said clause is a part of all the contracts he signs now…

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Third-Party Beneficiary: Meaning and Rights

a transfer of contract rights to a third party is an incidental benefit

What Is a Third-Party Beneficiary?

A third-party beneficiary is a person or business that benefits from the terms of a contract made between two other parties. In law, a third-party beneficiary may have certain rights that can be enforced if the contract is not fulfilled.

Understanding the Third-Party Beneficiary

There are certain standards that need to be met for the third party beneficiary to have legal rights to enforce a contract or to share in the proceeds. In particular, the benefit to the third party must be intended, rather than incidental.

Key Takeaways

A third-party beneficiary receives a benefit from a contract made between two other parties.
The beneficiary may have a right to compensation if the contract is not fulfilled.
The rights of the third-party beneficiary are strengthened if the contract includes a third-party beneficiary clause.

The clearest example of a third-party beneficiary is found in life insurance contracts. An individual enters into a contract with an insurance company that requires the payment of death benefits to a third party. That third party does not sign the contract and may not even be aware of its existence, yet is entitled to benefit from it.

The Rights of a Third-Party Beneficiary

Most examples are less clear-cut. Say the owner of a new office building signs a contract with a big company to lease four floors of space. The landlord then signs a separate contract with a small business person who wants to open a coffee shop on the ground floor, promising a steady stream of customers from the big company. The big company then reneges on the deal. Now the coffee shop owner is going bust.

Third-party rights are more enforceable if the benefit was intentional and the third party was aware of it.

Can the coffee shop owner demand compensation for the loss of business from the big company, based on its breach of contract with another party? As a third-party beneficiary, the coffee shop owner might or might not have a case.

The company could argue that the coffee shop owner was merely an incidental beneficiary, not an intended beneficiary . That is, the company did not plan to open offices in that building with the intention of enriching a coffee shop owner.

Clarifying Third-Party Beneficiary Rights

The rights of a third-party beneficiary are more clear-cut if that person or business is specifically named in the contract. In such cases, a third-party beneficiary clause is added that identifies an individual or company that expects to benefit from the agreement. In this agreement between three entities , the right is strengthened in law if the third-party beneficiary is aware of the agreement and the intended benefit.

For example, say a parent signed a lease and made a security deposit on a rental apartment for a child to live in while attending college. The student arrives in town and is denied access to the apartment. Adding insult to injury, the apartment has been rented to someone else. The student and the parent both have the right to demand compensation for the failure of the landlord to meet the terms of the contract.

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Chapter 12 – Third-Party Rights

Learning Objectives

After studying this chapter, you should be able to:

Explain how an assignment of contract rights is made and how it operates.
Explain how a delegation of duties is made and how it operates.
Compare and contrast Intended and Incidental Third-Party Beneficiary Agreements.
Analyze the rights and remedies available to third parties in contracts.

12 .1 General Perspectives on Third-Party Rights

Ordinarily only the parties to a contract have the right to enforce that contract. To this point in our studies, we have focused on the rights and duties of the two parties to a contract. The laws surrounding third-party rights govern the ability of third parties or outsiders to enforce contractual rights or to be bound by contractual obligations even though they are not a party to a contract. This allows individuals or entities that are not directly involved in a contract to benefit from or be bound by the contract’s terms.

There are several reasons why third-party rights in contracts exists. One reason is to ensure fairness and equity in contractual relationships. In many cases, outsiders may have a legitimate interest in the performance of a contract, and allowing them to enforce their rights or obligations under the contract can prevent injustice and promote the overall fairness of the legal system. Another is to promote efficiency and convenience in contractual relationships. By allowing outsiders to enforce their rights or obligations under a contract, parties to a contract can avoid the need for multiple contracts or legal actions, which can save time and resources. Finally, third-party rights can be used to facilitate economic transactions. In many industries, such as construction and real estate, contracts often involve multiple parties with different interests and responsibilities. Allowing outsiders to enforce rights or obligations under a contract can help ensure that everyone involved in a transaction is held accountable and that the transaction proceeds smoothly. This Chapter explores contracts where outsiders acquire rights or duties or both by considering:

Assignees (outsiders who acquire rights after the contract is made)

Delegatees (outsiders who acquire duties after the contract is made)

Third-party beneficiaries (outsiders who acquire rights when the original contract is made)

12 . 2 Assignment of Contract Rights

Contracts create rights and obligations between contracting parties. An assignment is the transfer of rights under a contract from one party (the assignor ) to another party (the assignee ). When a party assigns their rights under a contract, they are essentially transferring their ability to receive benefits or enforce terms of the contract to someone else. Stated another way, an assignment occurs when an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person ( assignee ); the obligee then becomes an assignor (one who makes an assignment). So, the party that makes the assignment is both an obligee and an assignor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor.

Generally, the assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are a common occurrence in business, legal, and financial transactions.

Figure 12 .1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment , the assignor must make known his intention to transfer the rights to the third person. This intention must take place in the present – it cannot be a future intention. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for no exchange of money or any other consideration. For example, Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, and need not be written.

Acceptance and Revocation

For the assignment to become effective, the assignee must manifest his acceptance under most circumstances. This is done automatically when, as is usually the case, the assignee has given consideration for the assignment (i.e., there is a contract between the assignor and the assignee in which the assignment is the assignor’s consideration), and then the assignment is not revocable without the assignee’s consent. Problems of acceptance normally arise only when the assignor intends the assignment as a gift. Then, for the assignment to be irrevocable, either the assignee must manifest his acceptance or the assignor must notify the assignee in writing of the assignment. Thus, if Mrs. Franklin assigns the $750 a month from the sale of her house to her son Jason as a gift, this assignment is valid, but revocable.

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged from their obligation within the contract. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice. Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

An assignment of rights effectively makes the assignee stand in the shoes of the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment. Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course. Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor. While a waiver of defenses makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

For that reason, there are various rules that limit both the holder in due course and the waiver rule. Certain defenses, the so-called real defenses (infancy, duress, and fraud in the execution, among others), may always be asserted. Also, the waiver clause in the contract must have been presented in good faith, and if the assignee has actual notice of a defense that the buyer or lessee could raise, then the waiver is ineffective. Moreover, in consumer transactions, the UCC’s rule is subject to state laws that protect consumers (people buying things used primarily for personal, family, or household purposes), and many states, by statute or court decision, have made waivers of defenses ineffective in such consumer transactions . Federal Trade Commission regulations also affect the ability of many sellers to pass on rights to assignees free of defenses that buyers could raise against them. Because of these various limitations on the holder in due course and on waivers, the “shoe rule” will not govern in consumer transactions and, if there are real defenses or the assignee does not act in good faith, in business transactions as well.

Prohibited Assignments

The general rule—as previously noted—is that most contract rights are assignable, and the law favors freely assignable rights. There are five exceptions to this rule however.

Material Change in Duties of the Obligor

When an assignment has the effect of materially changing the duties that the obligor must perform, it is ineffective. Changing the party to whom the obligor must make a payment is not a material change of duty that will defeat an assignment, since that, of course, is the purpose behind most assignments. Nor will a minor change in the duties the obligor must perform defeat the assignment. But, some changes are significant enough to bar assignments.

Assignment of Personal Rights

Nassau Hotel Co. v. Barnett & Barse Corporation , 147 N.Y.S. 283 (1914)

MCLAUGHLIN, J.

Plaintiff owns a hotel at Long Beach, L. I., and on the 21st of November, 1912, it entered into a written agreement with the individual defendants Barnett and Barse to conduct the same for a period of years.…Shortly after this agreement was signed, Barnett and Barse organized the Barnett & Barse Corporation with a capital stock of $10,000, and then assigned the agreement to it. Immediately following the assignment, the corporation went into possession and assumed to carry out its terms. The plaintiff thereupon brought this action to cancel the agreement and to recover possession of the hotel and furniture therein, on the ground that the agreement was not assignable. [Summary judgment in favor of the plaintiff, defendant corporation appeals.]

The only question presented is whether the agreement was assignable. It provided, according to the allegations of the complaint, that the plaintiff leased the property to Barnett and Barse with all its equipment and furniture for a period of three years, with a privilege of five successive renewals of three years each. It expressly provided:

‘That said lessees…become responsible for the operation of the said hotel and for the upkeep and maintenance thereof and of all its furniture and equipment in accordance with the terms of this agreement and the said lessees shall have the exclusive possession, control and management thereof. * * * The said lessees hereby covenant and agree that they will operate the said hotel at all times in a first-class business-like manner, keep the same open for at least six (6) months of each year, * * *’ and ‘in lieu of rental the lessor and lessees hereby covenant and agree that the gross receipts of such operation shall be, as received, divided between the parties hereto as follows: (a) Nineteen per cent. (19%) to the lessor. * * * In the event of the failure of the lessees well and truly to perform the covenants and agreements herein contained,’ they should be liable in the sum of $50,000 as liquidated damages. That ‘in consideration and upon condition that the said lessees shall well and faithfully perform all the covenants and agreements by them to be performed without evasion or delay the said lessor for itself and its successors, covenants and agrees that the said lessees, their legal representatives and assigns may at all times during said term and the renewals thereof peaceably have and enjoy the said demised premises.’ And that ‘this agreement shall inure to the benefit of and bind the respective parties hereto, their personal representatives, successors and assigns.’

The complaint further alleges that the agreement was entered into by plaintiff in reliance upon the financial responsibility of Barnett and Barse, their personal character, and especially the experience of Barnett in conducting hotels; that, though he at first held a controlling interest in the Barnett & Barse Corporation, he has since sold all his stock to the defendant Barse, and has no interest in the corporation and no longer devotes any time or attention to the management or operation of the hotel.

…[C]learly…the agreement in question was personal to Barnett and Barse and could not be assigned by them without the plaintiff’s consent. By its terms the plaintiff not only entrusted them with the care and management of the hotel and its furnishings—valued, according to the allegations of the complaint, at more than $1,000,000—but agreed to accept as rental or compensation a percentage of the gross receipts. Obviously, the receipts depended to a large extent upon the management, and the care of the property upon the personal character and responsibility of the persons in possession. When the whole agreement is read, it is apparent that the plaintiff relied, in making it, upon the personal covenants of Barnett and Barse. They were financially responsible. As already said, Barnett had had a long and successful experience in managing hotels, which was undoubtedly an inducing cause for plaintiff’s making the agreement in question and for personally obligating them to carry out its terms.

It is suggested that because there is a clause in the agreement to the effect that it should ‘inure to the benefit of and bind the respective parties hereto, their personal representatives and assigns,’ that Barnett and Barse had a right to assign it to the corporation. But the intention of the parties is to be gathered, not from one clause, but from the entire instrument [Citation] and when it is thus read it clearly appears that Barnett and Barse were to personally carry out the terms of the agreement and did not have a right to assign it. This follows from the language used, which shows that a personal trust or confidence was reposed by the plaintiff in Barnett and Barse when the agreement was made.

In [Citation] it was said: “Rights arising out of contract cannot be transferred if they…involve a relation of personal confidence such that the party whose agreement conferred those rights must have intended them to be exercised only by him in whom he actually confided.”

This rule was applied in [Citation] the court holding that the plaintiff—the assignee—was not only technically, but substantially, a different entity from its predecessor, and that the defendant was not obliged to entrust its money collected on the sale of the presses to the responsibility of an entirely different corporation from that with which it had contracted, and that the contract could not be assigned to the plaintiff without the assent of the other party to it.

The reason which underlies the basis of the rule is that a party has the right to the benefit contemplated from the character, credit, and substance of him with whom he contracts, and in such case he is not bound to recognize…an assignment of the contract.

The order appealed from, therefore, is affirmed.

Case questions

The corporation created to operate the hotel was apparently owned and operated by the same two men the plaintiff leased the hotel to in the first place. What objection would the plaintiff have to the corporate entity—actually, of course, a legal fiction—owning and operating the hotel?
The defendants pointed to the clause about the contract inuring to the benefit of the parties “and assigns.” So the defendants assigned the contract. How could that not be allowed by the contract’s own terms?
What is the controlling rule of law upon which the outcome here depends?

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignments. For example, the assignment of future wages is regulated by state and federal law, such an attempt to try to effect such an assignment would not be valid. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

A written contract may contain general language that prohibits assignment of rights or assignment of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.” In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties. Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title. Bottom line, even though a contract may expressly state it cannot be assigned, that may not always be the case.

Rose v. Vulcan Materials Co. 194 S.E.2d 521 (N.C. 1973)

HUSKINS, J.

…Plaintiff [Rose], after leasing his quarry to J. E. Dooley and Son, Inc., promised not to engage in the rock-crushing business within an eight-mile radius of [the city of] Elkin for a period of ten years. In return for this promise, J. E. Dooley and Son, Inc., promised, among other things, to furnish plaintiff stone f.o.b. the quarry site at Cycle, North Carolina, at stipulated prices for ten years.…

By a contract effective 23 April 1960, Vulcan Materials Company, a corporation…, purchased the stone quarry operations and the assets and obligations of J. E. Dooley and Son, Inc.…[Vulcan sent Rose a letter, part of which read:]

Mr. Dooley brought to us this morning the contracts between you and his companies, copies of which are attached. This is to advise that Vulcan Materials Company assumes all phases of these contracts and intends to carry out the conditions of these contracts as they are stated.

In early 1961 Vulcan notified plaintiff that it would no longer sell stone to him at the prices set out in [the agreement between Rose and Dooley] and would thereafter charge plaintiff the same prices charged all of its other customers for stone. Commencing 11 May 1961, Vulcan raised stone prices to the plaintiff to a level in excess of the prices specified in [the Rose-Dooley agreement].

At the time Vulcan increased the prices of stone to amounts in excess of those specified in [the Rose-Dooley contract], plaintiff was engaged in his ready-mix cement business, using large quantities of stone, and had no other practical source of supply. Advising Vulcan that he intended to sue for breach of contract, he continued to purchase stone from Vulcan under protest.…

The total of these amounts over and above the prices specified in [the Rose-Dooley contract] is $25,231.57, [about $260,000 in 2024 dollars] and plaintiff seeks to recover said amount in this action.

The [Rose-Dooley] agreement was an executory bilateral contract under which plaintiff’s promise not to compete for ten years gained him a ten-year option to buy stone at specified prices. In most states, the assignee of an executory bilateral contract is not liable to anyone for the nonperformance of the assignor’s duties thereunder unless he expressly promises his assignor or the other contracting party to perform, or ‘assume,’ such duties.…These states refuse to imply a promise to perform the duties, but if the assignee expressly promises his assignor to perform, he is liable to the other contracting party on a third-party beneficiary theory. And, if the assignee makes such a promise directly to the other contracting party upon a consideration, of course he is liable to him thereon. [Citation]

A minority of states holds that the assignee of an executory bilateral contract under a general assignment becomes not only assignee of the rights of the assignor but also delegatee of his duties; and that, absent a showing of contrary intent, the assignee impliedly promises the assignor that he will perform the duties so delegated. This rule is expressed in Restatement, Contracts, s 164 (1932) as follows:

(1) Where a party under a bilateral contract which is at the time wholly or partially executory on both sides purports to assign the whole contract, his action is interpreted, in the absence of circumstances showing a contrary intention, as an assignment of the assignor’s rights under the contract and a delegation of the performance of the assignor’s duties.

(2) Acceptance by the assignee of such an assignment is interpreted, in the absence of circumstances showing a contrary intention, as both an assent to become an assignee of the assignor’s rights and as a promise to the assignor to assume the performance of the assignor’s duties.’ (emphasis added)

We…adopt the Restatement rule and expressly hold that the assignee under a general assignment of an executory bilateral contract, in the absence of circumstances showing a contrary intention, becomes the delegatee of his assignor’s duties and impliedly promises his assignor that he will perform such duties.

The rule we adopt and reaffirm here is regarded as the more reasonable view by legal scholars and textwriters. Professor Grismore says:

It is submitted that the acceptance of an assignment in this form does presumptively import a tacit promise on the part of the assignee to assume the burdens of the contract, and that this presumption should prevail in the absence of the clear showing of a contrary intention. The presumption seems reasonable in view of the evident expectation of the parties. The assignment on its face indicates an intent to do more than simply to transfer the benefits assured by the contract. It purports to transfer the contract as a whole, and since the contract is made up of both benefits and burdens both must be intended to be included.…Grismore, Is the Assignee of a Contract Liable for the Nonperformance of Delegated Duties? 18 Mich.L.Rev. 284 (1920).

In addition, with respect to transactions governed by the Uniform Commercial Code, an assignment of a contract in general terms is a delegation of performance of the duties of the assignor, and its acceptance by the assignee constitutes a promise by him to perform those duties. Our holding in this case maintains a desirable uniformity in the field of contract liability.

We further hold that the other party to the original contract may sue the assignee as a third-party beneficiary of his promise of performance which he impliedly makes to his assignor, under the rule above laid down, by accepting the general assignment. Younce v. Lumber Co. , [Citation] (1908), holds that where the assignee makes an express promise of performance to his assignor, the other contracting party may sue him for breach thereof. We see no reason why the same result should not obtain where the assignee breaches his promise of performance implied under the rule of Restatement s 164. ‘That the assignee is liable at the suit of the third party where he expressly assumes and promises to perform delegated duties has already been decided in a few cases (citing Younce). If an express promise will support such an action it is difficult to see why a tacit promise should not have the same effect.’ Grismore, supra. Parenthetically, we note that such is the rule under the Uniform Commercial Code, [2-210].

We now apply the foregoing principles to the case at hand. The contract of 23 April 1960, between defendant and J. E. Dooley and Son, Inc., under which, as stipulated by the parties, ‘the defendant purchased the assets and obligations of J. E. Dooley and Son, Inc.,’ was a general assignment of all the assets and obligations of J. E. Dooley and Son, Inc., including those under [the Rose-Dooley contract]. When defendant accepted such assignment it thereby became delegatee of its assignor’s duties under it and impliedly promised to perform such duties.

When defendant later failed to perform such duties by refusing to continue sales of stone to plaintiff at the prices specified in [the Rose-Dooley contract], it breached its implied promise of performance and plaintiff was entitled to bring suit thereon as a third-party beneficiary.

The decision…is reversed with directions that the case be certified to the Superior Court of Forsyth County for reinstatement of the judgment of the trial court in accordance with this opinion.

Why did Rose need the crushed rock from the quarry he originally leased to Dooley?
What argument did Vulcan make as to why it should not be liable to sell crushed rock to Rose at the price set out in the Rose-Dooley contract?
What rule did the court here announce in deciding that Vulcan was required to sell rock at the price set out in the Rose-Dooley contract? That is, what is the controlling rule of law in this case?

Future Contracts

The law distinguishes between assigning future rights under an existing contract and assigning rights that will arise from a future contract. Rights contingent on a future event can be assigned in exactly the same manner as existing rights, as long as the contingent rights are already incorporated in a contract. Ben has a long-standing deal with his neighbor, Mrs. Robinson, to keep the latter’s walk clear of snow at twenty dollars a snowfall. Ben is saving his money for a new printer, but when he is eighty dollars shy of the purchase price, he becomes impatient and cajoles a friend into loaning him the balance. In return, Ben assigns his friend the earnings from the next four snowfalls. The assignment is effective. However, a right that will arise from a future contract cannot be the subject of a present assignment.

Partial Assignments

An assignor may assign part of a contractual right, but only if the obligor can perform that part of his contractual obligation separately from the remainder of his obligation. Assignment of part of a payment due is always enforceable. However, if the obligor objects, neither the assignor nor the assignee may sue him unless both are party to the suit. Mrs. Robinson owes Ben one hundred dollars. Ben assigns fifty dollars of that sum to his friend. Mrs. Robinson is perplexed by this assignment and refuses to pay until the situation is explained to her satisfaction. The friend brings suit against Mrs. Robinson. The court cannot hear the case unless Ben is also a party to the suit. This ensures all parties to the dispute are present at once and avoids multiple lawsuits.

Successive Assignments

It may happen that an assignor assigns the same interest twice. With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Some states follow the different English rule: the first assignee to give notice to the obligor has priority, regardless of the order in which the assignments were made. Furthermore, if the assignment falls within the filing requirements of UCC Article 9 the first assignee to file will prevail.

Figure 1 2 .2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

1 2 . 3 Delegation of Contract Duties

To this point, we have been considering the assignment of the assignor’s rights (usually, though not solely, to money payments). But in every contract, a right connotes a corresponding duty , and these may be delegated. A delegation is the transfer to a third party of the duty to perform under a contract. The one who delegates is the delegator . Because most obligees are also obligors , most assignments of rights will simultaneously carry with them the delegation of duties. Unless public policy or the contract itself bars the delegation, it is legally enforceable.

In most states, at common law, duties must be expressly delegated. Under Uniform Commercial Code (UCC) Section 2-210(4) and in a minority of states at common law an assignment of “the contract” or of “all my rights under the contract” is not only an assignment of rights but also a delegation of duties to be performed; by accepting the assignment, the delegatee (one to whom the delegation is made) implies a promise to perform the duties.

Figure 1 2 .3 Delegation of Duties

Effect on Obligor

An obligor who delegates a duty (and becomes a delegator ) does not thereby escape liability for performing the duty himself. The obligee of the duty may continue to look to the obligor for performance unless the original contract specifically provides for substitution by delegation. This is a big difference between assignment of contract rights and delegation of contract duties: in the former, the assignor is discharged (absent breach of assignor’s warranties); in the latter, the delegator remains liable. The obligee (again, the one to whom the duty to perform flows) may also, in many cases, look to the delegatee, because the obligee becomes an intended beneficiary of the contract between the obligor and the delegatee, as discussed in. Of course, the obligee may subsequently agree to accept the delegatee and discharge the obligor from any further responsibility for performing the duty. A contract among three persons having this effect is called a novation ; it is a new contract. Fred sells his house to Lisa, who assumes his mortgage. Fred, in other words, has delegated the duty to pay the bank to Lisa. If Lisa defaults, Fred continues to be liable to the bank, unless in the original mortgage agreement a provision specifically permitted any purchaser to be substituted without recourse to Fred, or unless the bank subsequently accepts Lisa and discharges Fred.

Nondelegable Duties

Many duties may be delegated. Indeed, if they could not be delegated, much of the world’s work would not get done. If you hire a construction company and an architect to design and build your house to certain specifications, the contractor may in turn hire individual craftspeople—plumbers, electricians, and the like—to do these specialized jobs, and as long as they are performed to specification, the contract terms will have been met. If you hired an architecture firm, though, you might not be contracting for the specific services of a particular individual in that firm. Yet, as was the case with assignments, there are certain duties that cannot be delegated. These are discussed below.

Personal Services

Personal services are not delegable. If a contract is such that the promisee expects the obligor personally to perform the duty, the obligor may not delegate it. Suppose the Catskill Civic Opera Association hires a famous singer to sing in its production of Carmen and the singer delegates the job to her understudy. The delegation is ineffective, and performance by the understudy does not absolve the famous singer of liability for breach.

Public Policy

Public policy may prohibit certain kinds of delegations. A public official, for example, may not delegate the duties of her office to private citizens, although various statutes generally permit the delegation of duties to her assistants and subordinates.

Delegations Barred by Contract

As we have already noted, the contract itself may bar assignment. The law generally disfavors restricting the right to assign a benefit, but it will uphold a contract provision that prohibits delegation of a duty. Thus, as we have seen, UCC Section 2-210(3) states that in a contract for sale of goods, a provision against assigning “the contract” is to be construed only as a prohibition against delegating the duties.

1 2 . 4 Third-Party Beneficiaries

With assignments and delegations , we observed situations in which third-parties were brought into a pre-existing contract. An intended third-party beneficiary , on the other hand, is a party that was considered at the time the contract was made, and is part of the purpose for the contract in the first place. A party to a contract cannot enforce its terms; b ut if the party is intended to benefit from the performance of a contract between others, it makes sense that they should be able to enforce the contract.

Two Types of Third-Party Beneficiaries

In the vocabulary of the Restatement , a third person whom the parties to the contract intend to benefit is an intended beneficiary —that is, one who is entitled under the law of contracts to assert a right arising from a contract to which he or she is not a party. There are two types of intended beneficiaries .

Creditor Beneficiary

A creditor beneficiary is one to whom the promisor agrees to pay a debt of the promisee . For example, a father is bound by law to support his child. If the child’s uncle (the promisor ) contracts with the father (the promisee ) to furnish support for the child, the child is a creditor beneficiary and could sue the uncle. Or again, suppose Customer pays Ace Dealer for a new car, and Ace delegates the duty of delivery to Beta Dealer. Ace is now a debtor: he owes Customer something: a car. Customer is a creditor; she is owed something: a car. When Beta performs under his delegated contract with Ace, Beta is discharging the debt Ace owes to Customer. Customer is a creditor beneficiary of Dealers’ contract and could sue either one for nondelivery . She could sue Ace because she made a contract with him, and she could sue Beta because—again—she was intended to benefit from the performance of Dealers’ agreement.

Donee Beneficiary

Incidental Beneficiary

If a person is not an intended beneficiary—not a creditor or donee beneficiary—then he or she is said to be only an incidental beneficiary , and that person has no rights. An incidental third-party beneficiary is a party who may actually benefit from a contract between two other parties, but that benefit is like a side effect of the contract, because the contract itself was not specifically intended to benefit them. In other words, the third party is not a direct party to the contract but might still receive some benefits from the contract if it is performed as intended. Incidental beneficiaries have no legal right to enforce the contract or sue for damages if the contract is breached.

Modification of the Beneficiary’s Rights

Conferring rights on an intended beneficiary is relatively simple. Whether his rights can be modified or extinguished by subsequent agreement of the promisor and promisee is a more troublesome issue. The general rule is that the beneficiary’s rights may be altered as long as there has been no vesting of rights (the rights have not taken effect). The time at which the beneficiary’s rights vest differs among jurisdictions: some say immediately, some say when the beneficiary assents to the receipt of the contract right, some say the beneficiary’s rights don’t vest until she has detrimentally relied on the right. The Restatement says that unless the contract provides that its terms cannot be changed without the beneficiary’s consent, the parties may change or rescind the benefit unless the beneficiary has sued on the promise, has detrimentally relied, or has assented to the promise at the request of one of the parties. Some contracts provide that the benefit never vests; for example, standard insurance policies today reserve to the insured the right to substitute beneficiaries, to borrow against the policy, to assign it, and to surrender it for cash.

Government Contracts

The general rule is that members of the public are only incidental beneficiaries of contracts made by the government with a contractor to do public works. It is not illogical to see a contract between the government and a company pledged to perform a service on behalf of the public as one creating rights in particular members of the public, but the consequences of such a view could be extremely costly because everyone has some interest in public works and government services.

A restaurant chain, hearing that the county was planning to build a bridge that would reroute commuter traffic, might decide to open a restaurant on one side of the bridge; if it let contracts for construction only to discover that the bridge was to be delayed or canceled, could it sue the county’s contractor? In general, the answer is that it cannot. A promisor under contract to the government is not liable for the consequential damages to a member of the public arising from its failure to perform (or from a faulty performance) unless the agreement specifically calls for such liability or unless the promisee (the government) would itself be liable and a suit directly against the promisor would be consistent with the contract terms and public policy. When the government retains control over litigation or settlement of claims, or when it is easy for the public to insure itself against loss, or when the number and amount of claims would be excessive, the courts are less likely to declare individuals to be intended beneficiaries. But the service to be provided can be so tailored to the needs of particular persons that it makes sense to view them as intended beneficiaries .

Kornblut v. Chevron Oil Co. , 62 A.D.2d 831 (N.Y. 1978)

HOPKINS, J.

The plaintiff-respondent has recovered a judgment after a jury trial in the sum of $519,855.98 [about $2.6 million in 2024 dollars] including interest, costs and disbursements, against Chevron Oil Company (Chevron) and Lawrence Ettinger, Inc. (Ettinger) (hereafter collectively referred to as defendants) for damages arising from the death and injuries suffered by Fred Kornblut, her husband. The case went to the jury on the theory that the decedent was the third-party beneficiary of a contract between Chevron and the New York State Thruway Authority and a contract between Chevron and Ettinger.

On the afternoon of an extremely warm day in early August, 1970 the decedent was driving northward on the New York State Thruway. Near Sloatsburg, New York, at about 3:00 p.m., his automobile sustained a flat tire. At the time the decedent was accompanied by his wife and 12-year-old son. The decedent waited for assistance in the 92 degree temperature.

After about an hour a State Trooper, finding the disabled car, stopped and talked to the decedent. The trooper radioed Ettinger, which had the exclusive right to render service on the Thruway under an assignment of a contract between Chevron and the Thruway Authority. Thereafter, other State Troopers reported the disabled car and the decedent was told in each instance that he would receive assistance within 20 minutes.

Having not received any assistance by 6:00 p.m., the decedent attempted to change the tire himself. He finally succeeded, although he experienced difficulty and complained of chest pains to the point that his wife and son were compelled to lift the flat tire into the trunk of the automobile. The decedent drove the car to the next service area, where he was taken by ambulance to a hospital; his condition was later diagnosed as a myocardial infarction. He died 28 days later.

Plaintiff sued, inter alia, Chevron and Ettinger alleging in her complaint causes of action sounding in negligence and breach of contract. We need not consider the issue of negligence, since the Trial Judge instructed the jury only on the theory of breach of contract, and the plaintiff has recovered damages for wrongful death and the pain and suffering only on that theory.

We must look, then, to the terms of the contract sought to be enforced. Chevron agreed to provide “rapid and efficient roadside automotive service on a 24-hour basis from each gasoline service station facility for the areas…when informed by the authority or its police personnel of a disabled vehicle on the Thruway”. Chevron’s vehicles are required “to be used and operated in such a manner as will produce adequate service to the public, as determined in the authority’s sole judgment and discretion”. Chevron specifically covenanted that it would have “sufficient roadside automotive service vehicles, equipment and personnel to provide roadside automotive service to disabled vehicles within a maximum of thirty (30) minutes from the time a call is assigned to a service vehicle, subject to unavoidable delays due to extremely adverse weather conditions or traffic conditions.”…

In interpreting the contract, we must bear in mind the circumstances under which the parties bargained. The New York Thruway is a limited access toll highway, designed to move traffic at the highest legal speed, with the north and south lanes separated by green strips. Any disabled vehicle on the road impeding the flow of traffic may be a hazard and inconvenience to the other users. The income realized from tolls is generated from the expectation of the user that he will be able to travel swiftly and smoothly along the Thruway. Consequently, it is in the interest of the authority that disabled vehicles will be repaired or removed quickly to the end that any hazard and inconvenience will be minimized. Moreover, the design and purpose of the highway make difficult, if not impossible, the summoning of aid from garages not located on the Thruway. The movement of a large number of vehicles at high speed creates a risk to the operator of a vehicle who attempts to make his own repairs, as well as to the other users. These considerations clearly prompted the making of contracts with service organizations which would be located at points near in distance and time on the Thruway for the relief of distressed vehicles.

Thus, it is obvious that, although the authority had an interest in making provision for roadside calls through a contract, there was also a personal interest of the user served by the contract. Indeed, the contract provisions regulating the charges for calls and commanding refunds be paid directly to the user for overcharges, evince a protection and benefit extended to the user only. Hence, in the event of an overcharge, the user would be enabled to sue on the contract to obtain a recovery.…Here the contract contemplates an individual benefit for the breach running to the user.…

By choosing the theory of recovery based on contract, it became incumbent on the plaintiff to show that the injury was one which the defendants had reason to foresee as a probable result of the breach, under the ancient doctrine of Hadley v Baxendale [Citation], and the cases following it…in distinction to the requirement of proximate cause in tort actions.…

The death of the decedent on account of his exertion in the unusual heat of the midsummer day in changing the tire cannot be said to have been within the contemplation of the contracting parties as a reasonably foreseeable result of the failure of Chevron or its assignee to comply with the contract.…

The case comes down to this, then, in our view: though the decedent was the intended beneficiary to sue under certain provisions of the contract—such as the rate specified for services to be rendered—he was not the intended beneficiary to sue for consequential damages arising from personal injury because of a failure to render service promptly. Under these circumstances, the judgment must be reversed and the complaint dismissed, without costs or disbursements.

[Martuscello, J., concurred in the result but opined that the travelling public was not an intended beneficiary of the contract.]

Chevron made two arguments as to why it should not be liable for Mr. Kornblut’s death. What were they?
Obviously, when Chevron made the contract with the New York State Thruway Authority, it did not know Mr. Kornblut was going to be using the highway. How could he, then, be an intended beneficiary of the contract?
Why was Chevron not found liable for Mr. Kornblut’s death when, clearly, had it performed the contract properly, he would not have died?

Activity 12A

Which is Which?

End of Chapter Exercises

The Dayton Country Club offered its members various social activities. Some members were entitled, for additional payment, to use the golf course, a coveted amenity. Golfing memberships could not be transferred except upon death or divorce, and there was a long waiting list in this special category; if a person at the top of the list declined, the next in line was eligible. Golfing membership rules were drawn up by a membership committee. Magness and Redman were golfing members. They declared bankruptcy, and the bankruptcy trustee sought, in order to increase the value of their debtors’ estates, to assume and sell the golfing memberships to members on the waiting list, other club members, or the general public, provided the persons joined the club. The club asserted that under relevant state law, it was “excused from rendering performance to an entity other than the debtor”—that is, it could not be forced to accept strangers as members. Can these memberships be assigned?
Tenant leased premises in Landlord’s shopping center, agreeing in the lease “not to assign, mortgage, pledge, or encumber this lease in whole or in part.” Under the lease, Tenant was entitled to a construction allowance of up to $11,000 after Tenant made improvements for its uses. Prior to the completion of the improvements, Tenant assigned its right to receive the first $8,000 of the construction allowance to Assignee, who, in turn, provided Tenant $8,000 to finance the construction. Assignee notified Landlord of the assignment, but when the construction was complete, Landlord paid Tenant anyway; when Assignee complained, Landlord pointed to the nonassignment clause. Assignee sued Landlord. Who wins? [1]
Marian contracted to sell her restaurant to Billings for $400,000. The contract provided that Billings would pay $100,000 and sign a note for the remainder. Billings sold the restaurant to Alice, who agreed to assume responsibility for the balance due on the note held by Marian. But Alice had difficulties and declared bankruptcy. Is Billings still liable on the note to Marian?
Yellow Cab contracted with the Birmingham Board of Education to transport physically handicapped students. The contract provided, “Yellow Cab will transport the physically handicapped students of the School System…and furnish all necessary vehicles and personnel and will perform all maintenance and make all repairs to the equipment to keep it in a safe and efficient operating condition at all times.”
Joan hired Groom to attend to her herd of four horses at her summer place in the high desert. The job was too much for Groom, so he told Tony that he (Groom) would pay Tony, who claimed expertise in caring for horses, to take over the job. Tony neglected the horses in hot weather, and one of them needed veterinarian care for dehydration. Is Groom liable?
Rensselaer Water Company contracted with the city to provide water for business, domestic, and fire-hydrant purposes. While the contract was in effect, a building caught on fire; the fire spread to Plaintiff’s ( Moch Co.’s) warehouse, destroying it and its contents. The company knew of the fire but was unable to supply adequate water pressure to put it out. Is the owner of the warehouse able to maintain a claim against the company for the loss?
Rusty told Alice that he’d do the necessary overhaul on her classic car for $5,000 during the month of May, and that when the job was done, she should send the money to his son, Jim, as a graduation present. He confirmed the agreement in writing and sent a copy to Jim. Subsequently, Rusty changed his mind. What right has Jim?
Fox Brothers agreed to convey to Clayton Canfield Lot 23 together with a one-year option to purchase Lot 24 in a subdivision known as Fox Estates. The agreement contained no prohibitions, restrictions, or limitations against assignments. Canfield paid the $20,000 and took title to Lot 23 and the option to Lot 24. Canfield thereafter assigned his option rights in Lot 24 to the Scotts. When the Scotts wanted to exercise the option, Fox Brothers refused to convey the property to them. The Scotts then brought suit for specific performance. Who wins?
Rollins sold Byers, a businessperson, a flatbed truck on a contract; Rollins assigned the contract to Frost, and informed Byers of the assignment. Rollins knew the truck had problems, which he did not reveal to Byers. When the truck needed $3,200 worth of repairs and Rollins couldn’t be found, Byers wanted to deduct that amount from payments owed to Frost, but Frost insisted he had a right to payment. Upon investigation, Byers discovered that four other people in the state had experienced similar situations with Rollins and with Frost as Rollins’s assignee. What recourse has Byers?
Merchants and resort owners in the San Juan Islands in Washington State stocked extra supplies, some perishable, in anticipation of the flood of tourists over Labor Day. They suffered inconvenience and monetary damage due to the union’s Labor Day strike of the state ferry system, in violation of its collective bargaining agreement with the state and of a temporary restraining order. The owners sued the union for damages for lost profits, attorney fees, and costs, claiming the union should be liable for intentional interference with contractual relations (the owners’ relations with their would-be customers). Do the owners have a cause of action?

Aldana v. Colonial Palms Plaza, Inc. , 591 So.2d 953 (Fla. Ct. App., 1991).

DuPont v. Yellow Cab Co. of Birmingham, Inc. , 565 So.2d 190 (Ala. 1990).

Restatement (Second) of Contracts, Section 311.

Restatement (Second) of Contracts, Section 317(1).

Restatement (Second) of Contracts, Section 322.

Uniform Commercial Code, Section 9-206.

an entitlement to something, whether to a concept like justice or due process, or to a legally enforceable claim or interest

the ability of third parties or outsiders to enforce contractual rights or to be bound by contractual obligations even though they are not a party to the contract

a person to whom a property right is transferred

one to whom the duty to perform under a contract is transferred

the transfer of rights under a contract from one party to another party

the party who transfers their rights to another

one to whom an obligation is made

one who makes and has an obligation

a legal relationship, created by law or contract, in which a person or business owes something to another

relevant and significant

the transfer to a third party of the duty to perform under a contract

the party who delegates the duty to perform under the contract to a third party

a set of statutes governing the conduct of business, sales, warranties, negotiable instruments, loans secured by personal property and other commercial matters

the state of being legally responsible for something

a party that was considered at the time the contract was made, and is part of the purpose for the contract in the first place

a legal treatise from the second series of the Restatements of the Law which seeks to inform judges and lawyers about general principles of contract common law

one to whom the promisor agrees to pay a debt of the promisee

one who makes a promise

one to whom a promise is made

a direct beneficiary whom the party paying for the other party's performance intends to benefit as a gift or donation

a third-party beneficiary to a contract whom the parties to the contract did not intend to benefit

Intended Vs. Incidental Third-Party Beneficiary Status

Bret L. McCabe Partner [email protected]

May 16, 2023

During the course of real estate development and construction operations, one issue that may arise during contract negotiation (and potential subsequent litigation) is whether or not the parties intend(ed) to confer beneficiary status to a non-signatory third-party.

This concept of whether said third-party is in fact granted “Intended Third Party Beneficiary” status may dictate whether or not the third-party has the right to enforce the obligations of the contract.

In the absence of explicit language that the parties intended to benefit a third party, New York Courts have articulated that ‘the third party is merely an incidental beneficiary with no right to enforce the particular contracts’ (Dormitory Authority of the State of NY vs. Samson Construction Co., 30 N.Y.3d 704 (2018) citing Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 655 [1976] at 656).

In this vein, within its 2018 Dormitory decision, the NYS Court of Appeals ruled that in the context of construction contracts, express contractual language is required “stating that the contracting parties intended to benefit a third party ‘to enforce a promisee’s contract with another’” (Id.)

This distinction between “Incidental” and “Intended” status makes it clear that contractual language must be unambiguous and obvious regarding the intent to include a third-party beneficiary.

The Court of Appeals in the Dormitory decision rejected the premise that a party was an intended beneficiary if language does not exist within the Agreement expressly stating such intention.

Additionally, in 2019, in the matter of HTRF Ventures, LLC v. Permasteelisa N. Am. Corp., 2019 NY Slip Op. 32095(U), the honorable Joel Cohen of the Supreme Court of New York County further opined: “The Court of Appeals has held that a third party has the “right to enforce a contract in two situations: [(1)] when the third party is the only one who could recover for the breach of contract; or [(2)] when it is otherwise clear from the language of the contract that there was ‘an intent to permit enforcement by the third party’ (id., quoting Fourth Ocean Putnam Corp. v Interstate Wrecking Co., 66 N.Y.2d 38, 45 [1985])…With respect to the latter situation, the First Department has held that “a third party cannot be deemed an intended beneficiary of a contract unless ‘the parties’ intent to benefit the third party [is] apparent from the face of the contract” (Commissioner of the Dep’t of Social Servs. of the City of N. Y. v New York-Presbyt. Hosp., 164 A.D.3d 93, 98 [1st Dep’t 2018], Iv denied 33 N.Y.3d 901 [2019] [internal quotation marks and citation omitted]).”

Judge Cohen further articulated that: “Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent” (HTRF citing LaSalle Natl. Bank v Ernst & Young, 285 A.D.2d 101, 108-109 [1st Dep’t 2001]).

As such, any argument for third-party beneficiary status is contingent upon whether or not the contractual provisions unmistakably and clearly state such intent between the signatories.

Therefore, it is imperative the parties to a contract are aware that for such status to be extended to a third-party, clear language is required which on its face makes such intent explicit.

This issue often arises throughout the course of construction contract negotiation, and some litigation related thereto, as well as in the context of specific litigation between a condominium homeowner association (or building manager) and particular unit owners as related to the remittance and collection of building common charges.

This article was published on the New York Real Estate Journal’s website on May 16, 2023.

Forchelli Deegan Terrana LLP 333 Earle Ovington Blvd., Suite 1010 Uniondale, NY 11553 Phone: 516.248.1700 Fax: 516.248.1729

third-party beneficiary

Primary tabs.

A third-party beneficiary is a person who is not a contracting party of a contract but can still receive the benefits from the performance of the contract. The privity of the contract is between the contracting parties - the promisor and promisee . A promisor is a party that makes promises to benefit the third-party beneficiary. A promisee is a party who pays consideration to obtain the promisor’s promise. For instance, a mother purchased medical insurance for her son from an insurance company; the mother is the promisee, the son is the third-party beneficiary and the company is the promisor.

If a person is not the original party to a contract, they usually cannot enforce the contract or assert a claim of a breach of contract against any party; however, there is an exception. If the person is an intended third-party beneficiary and their rights of the contract are vested , then they have the same rights as the parties of the contract.

Classifications:

Intended third-party beneficiary.

An intended beneficiary is an identified third-party that contracting parties intend to give benefits via their promised performances, like doing or not doing something or paying money. The beneficiary may get named in a contract to have contractual rights, but it is not necessary for them to be identifiable at the time the contract is formed. Meanwhile, even if the promise is not made to them directly, they may still enforce the contract.

The Restatement of Contract §133 divides intended beneficiaries into two categories:

The law says: “A donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the promise of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary.”
It is a default rule to confer gifts. A donee is a person the promisee intends to benefit without asking for any payback. Once the donee knows the contract, the right is vested. If any contracting party breaches a promise, the creditor can only sue the promisor unless the donee has detrimental reliance on it.
The law says: “A creditor beneficiary if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, or a right of the beneficiary against the promisee which has been barred by the Statute of Limitations or by a discharge in bankruptcy, or which is unenforceable because of the Statute of Frauds.”
A creditor is a person whom a debt is owed by the promisee and paid by the promisor. The creation of it is to extinguish debt . Once the creditor has detrimental reliance on it, the right is vested. If any contracting party breaches promise, the creditor can sue both promisor and promisee. The contracting parties can defend the creditor by asserting claims they have against the other contracting party.

Incidental third-party beneficiary

If a beneficiary does not belong to above categories, they are an incidental beneficiary. An incidental beneficiary is a person whom contracting parties did not intend to benefit when they contracted but happens to get benefits.
Since an incidental beneficiary is not named in the contract and not intentionally included, they have no rights under the contract and cannot sue for breach of contract.

The contractual rights cannot be enforced by the third-party beneficiary until the rights are vested . Vesting occurs when the beneficiary:

Has knowledge of the promise and:
Manifests assent to a promise in the manner requested by the contract or contracting parties, or
Sues to enforce the promise, or
Detrimentally relies on the promise, or
Express contract term vesting rights.

Prior to vesting, contracting parties can rescind or modify the beneficiary’s contractual rights without the beneficiary's consent or knowledge. Once rights are vested, the contract cannot be changed or modified unless the third-party consent.

Even though there is no contract privity among the third-party beneficiary and contracting parties, the third-party beneficiary may still have the right to sue them to enforce the contract or seek damages for the breach.
Generally, the beneficiary can only sue the promisor to enforce the duty created by the promise in the contract. The promisor can defend against the promisee. The beneficiary cannot sue the promisee unless they detrimentally rely on the promise. If the beneficiary is a donee beneficiary, they cannot ask for delivery of a promised gift, but only for recovery under equitable principles of justice. However, there is an exception that the creditor beneficiary can sue on the debt , which is the original obligation , for getting debts paid by promisee.
If a contract is conditioned on the satisfaction of the beneficiary, then the subjective test only depends on whether the beneficiary honestly believes that the contract was satisfied – the opinions of other reasonable persons are not relevant.

Contracting parties: promisor & promisee

If the promisor did not perform their promise to benefit the third party, the promisee may sue them for a specific performance.
The contracting parties can modify or rescind the contract via a subsequent contract if the contract didn’t vest, as they retain the right to change their duty. This right will be terminated if the beneficiary materially relies on the promise.

[Last updated in June of 2022 by the Wex Definitions Team ]

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14.3: Third-Party Beneficiaries

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LEARNING OBJECTIVES

Know what a third-party beneficiary is, and what the types of such beneficiaries are.
Recognize the rights obtained by third-party beneficiaries.
Understand when the public might be a third-party beneficiary of government contracts.

The fundamental issue with third-party beneficiaries gets to this: can a person who is not a party to a contract sue to enforce its terms?

The General Rule

The general rule is this: persons not a party to a contract cannot enforce its terms; they are said to lack privity , a private, face-to-face relationship with the contracting parties. But if the persons are intended to benefit from the performance of a contract between others, then they can enforce it: they are intended beneficiaries.

Two Types of Third-Party Beneficiaries

In the vocabulary of the Restatement, a third person whom the parties to the contract intend to benefit is an intended beneficiary —that is, one who is entitled under the law of contracts to assert a right arising from a contract to which he or she is not a party. There are two types of intended beneficiaries.

Creditor Beneficiary

A creditor beneficiary is one to whom the promisor agrees to pay a debt of the promisee. For example, a father is bound by law to support his child. If the child’s uncle (the promisor) contracts with the father (the promisee) to furnish support for the child, the child is a creditor beneficiary and could sue the uncle. Or again, suppose Customer pays Ace Dealer for a new car, and Ace delegates the duty of delivery to Beta Dealer. Ace is now a debtor: he owes Customer something: a car. Customer is a creditor; she is owed something: a car. When Beta performs under his delegated contract with Ace, Beta is discharging the debt Ace owes to Customer. Customer is a creditor beneficiary of Dealers’ contract and could sue either one for nondelivery. She could sue Ace because she made a contract with him, and she could sue Beta because—again—she was intended to benefit from the performance of Dealers’ agreement.

Donee Beneficiary

The second type of intended beneficiary is a donee beneficiary . When the promisee is not indebted to the third person but intends for him or her to have the benefit of the promisor’s performance, the third person is a donee beneficiary (and the promise is sometimes called a gift promise). For example, an insurance company (the promisor) promises to its policyholder (the promisee), in return for a premium, to pay $100,000 to his wife on his death; this makes the wife a donee beneficiary (see Figure 14.1 "Assignment of Rights" ). The wife could sue to enforce the contract although she was not a party to it. Or if Able makes a contract with Woodsman for the latter to cut the trees in Able’s backyard as a Christmas gift to Able’s uphill Neighbor (so that Neighbor will have a view), Neighbor could sue Woodsman for breach of the contract.

If a person is not an intended beneficiary—not a creditor or donee beneficiary—then he or she is said to be only an incidental beneficiary , and that person has no rights. So if Able makes the contract with Woodsman not to benefit Neighbor but for Able’s own benefit, the fact that the tree removal would benefit Neighbor does not make Neighbor an intended beneficiary.

The beneficiary’s rights are always limited by the terms of the contract. A failure by the promisee to perform his part of the bargain will terminate the beneficiary’s rights if the promisee’s lapse terminates his own rights, absent language in the contract to the contrary. If Able makes the contract as a gift to Neighbor but doesn’t make the required down payment to Woodsman, Neighbor’s claim fails. In a suit by the beneficiary, the promisor may avail himself of any defense he could have asserted against the promisee. Woodsman may defend himself against Neighbor’s claim that Woodsman did not do the whole job by showing that Able didn’t make full payment for the work.

Modification of the Beneficiary’s Rights

Conferring rights on an intended beneficiary is relatively simple. Whether his rights can be modified or extinguished by subsequent agreement of the promisor and promisee is a more troublesome issue. The general rule is that the beneficiary’s rights may be altered as long as there has been no vesting of rights (the rights have not taken effect). The time at which the beneficiary’s rights vest differs among jurisdictions: some say immediately, some say when the beneficiary assents to the receipt of the contract right, some say the beneficiary’s rights don’t vest until she has detrimentally relied on the right. The Restatement says that unless the contract provides that its terms cannot be changed without the beneficiary’s consent, the parties may change or rescind the benefit unless the beneficiary has sued on the promise, has detrimentally relied, or has assented to the promise at the request of one of the parties.Restatement (Second) of Contracts, Section 311. Some contracts provide that the benefit never vests; for example, standard insurance policies today reserve to the insured the right to substitute beneficiaries, to borrow against the policy, to assign it, and to surrender it for cash.

Government Contracts

KEY TAKEAWAY

Generally, a person who is not a party to a contract cannot sue to enforce its terms. The exception is if the person is an intended beneficiary, either a creditor beneficiary or a donee beneficiary. Such third parties can enforce the contract made by others but only get such rights as the contract provides, and beneficiaries are subject to defenses that could be made against their benefactor.

The general rule is that members of the public are not intended beneficiaries of contracts made by the government, but only incidental beneficiaries.

What are the two types of intended beneficiaries?
Smith contracted to deliver a truck on behalf of Truck Sales to Byers, who had purchased it from Truck Sales. Smith was entitled to payment by Byers for the delivery. The truck was defective. May Byers withhold payment from Smith to offset the repair costs?
Why is the public not usually considered an intended beneficiary of contracts made by the government?

Third Party Contracts: Everything You Need to Know

Third party contracts are agreements that involve a person who isn't a party to a contract but is involved with the transaction. 3 min read updated on February 01, 2023

Third party contracts are agreements that involve a person who isn't a party to a contract but is involved with the transaction. This person may be a buyer representing one of the parties.

About Third Party Contracts

Think of a third-party as individual who isn't directly involved with a transaction but may be affected by it. The third-party generally has no legal rights in the transaction unless the contract is for their benefit.

Third Party Beneficiary

A contract is drawn up and the parties to the contract want a third-party to be able to sue if the contract promise isn't fulfilled. This person is considered a third-party beneficiary. In other words, when a contract results in benefits for the third person, they become a third-party beneficiary with the authority to have the contract enforced.

An example of a third-party beneficiary contract is one drawn up with a life insurance company. With a contract, the insurance company has made a promise to the person being insured that the insurance company will pay the beneficiary. Using the life insurance contract as an example, you have a policy and your spouse is the beneficiary. You die, which results in your spouse receiving proceeds from the policy.

In the event the insurance company refuses to pay according to the terms of the contract, he or she has the right to file a lawsuit against the insurance company. This action can be brought even though the person wasn't a party to the contract.

There's also the situation where the contract's beneficiary is a class of people versus a specifically named person. An example would be a contract between an employer and a union. In this situation, one of the individuals covered by the union contract is able to file suit even though he or she isn't specifically named.

Before a third-party beneficiary can file suit, the contract must be clear the intent on the contract is involves direct benefits of a third person.

When a contract is performed, everyone who may benefit from the contract is not entitled to file a lawsuit as a third-party beneficiary. These persons are referred to as incidental beneficiaries and have no rights regarding the contract. In court, it would be determined that the beneficiary had no "standing" to file a suit if the contract was broken.

About Assignments

An assignment refers to one person who is party to a contract (the assignor) transfers their rights to another person known as the assignee . The assignee may sue the contract directly versus the person named as the assignor. The originator of the contract is referred to as the obligor. There are basically no formal requirements for an assignment unless a statute is in place with specific requirements. If any words in the contract show intent to transfer rights, that's enough to constitute an assignment.

If the assignment doesn't include any consideration, it doesn't negate the validity of the assignment. This is because an assignment is a transfer of a right, not a contract.

Assignments may be made for several reasons:

The assignment may be a gift.
An assignment may be made for future money.
Any contract can be assigned as long as the obligor gives permission.
A contract for personal services can't be assigned unless all parties agree.
A contract may prevent the assignment of any rights. In some courts, a contract that prohibits assignments is binding and any assignment made violating the prohibition has no effect.
The assignor isn't relieved of contract obligations due to an assignment. Only the other party to the contract may relieve them.

When it comes to an assignment of a right to the money, the prohibition of the assignment is generally considered invalid. If assigning a right for the performance of personal services would increase the obligor's burden in performing the contract, an assignment is typically not permitted. A contract that involves the performance of personal services can only be assigned with the obligor's permission.

About Delegates

The delegation of the duties of a contract refers to the transfer of those obligations. The person named in the contract responsible for the duty is known as the delegate. Although the delegate must perform the contract, the delegator (or the person originally contracted to perform) remains liable for the performance.

If you need help with third-party contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

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Chapter 14 – third-party rights.

LEARNING OBJECTIVES

After reading this chapter, you should understand the following:

How an assignment of contract rights is made and how it operates
What a delegation of duties is and how it operates
Under what circumstances a person not a party to a contract can enforce it

To this point, we have focused on the rights and duties of the two parties to the contract. In this chapter, we turn our attention to contracts in which outsiders acquire rights or duties or both. Three types of outsiders merit examination:

Assignees (outsiders who acquire rights after the contract is made)
Delegatees (outsiders who acquire duties after the contract is made)
Third-party beneficiaries (outsiders who acquire rights when the original contract is made)

14.1 Assignment of Contract Rights

Understand what an assignment is and how it is made.
Recognize the effect of the assignment.
Know when assignments are not allowed.
Understand the concept of assignor’s warranties.

The Concept of a Contract Assignment

Contracts create rights and duties. By an assignment , an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person ( assignee ); the obligee then becomes an assignor (one who makes an assignment).

The Restatement (Second) of Contracts defines an assignment of a right as “a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires the right to such performance.”Restatement (Second) of Contracts, Section 317(1). The one who makes the assignment is both an obligee and a transferor. The assignee acquires the right to receive the contractual obligations of the promisor, who is referred to as the obligor (see Figure 14.1 "Assignment of Rights"). The assignor may assign any right unless (1) doing so would materially change the obligation of the obligor, materially burden him, increase his risk, or otherwise diminish the value to him of the original contract; (2) statute or public policy forbids the assignment; or (3) the contract itself precludes assignment. The common law of contracts and Articles 2 and 9 of the Uniform Commercial Code (UCC) govern assignments. Assignments are an important part of business financing, such as factoring. A factor is one who purchases the right to receive income from another.

Figure 14.1 Assignment of Rights

Method of Assignment

Manifesting assent.

To effect an assignment, the assignor must make known his intention to transfer the rights to the third person. The assignor’s intention must be that the assignment is effective without need of any further action or any further manifestation of intention to make the assignment. In other words, the assignor must intend and understand himself to be making the assignment then and there; he is not promising to make the assignment sometime in the future.

Under the UCC, any assignments of rights in excess of $5,000 must be in writing, but otherwise, assignments can be oral and consideration is not required: the assignor could assign the right to the assignee for nothing (not likely in commercial transactions, of course). Mrs. Franklin has the right to receive $750 a month from the sale of a house she formerly owned; she assigns the right to receive the money to her son Jason, as a gift. The assignment is good, though such a gratuitous assignment is usually revocable, which is not the case where consideration has been paid for an assignment.

Acceptance and Revocation

Notice to the obligor is not required, but an obligor who renders performance to the assignor without notice of the assignment (that performance of the contract is to be rendered now to the assignee) is discharged. Obviously, the assignor cannot then keep the consideration he has received; he owes it to the assignee. But if notice is given to the obligor and she performs to the assignor anyway, the assignee can recover from either the obligor or the assignee, so the obligor could have to perform twice, as in Exercise 2 at the chapter’s end, Aldana v. Colonial Palms Plaza . Of course, an obligor who receives notice of the assignment from the assignee will want to be sure the assignment has really occurred. After all, anybody could waltz up to the obligor and say, “I’m the assignee of your contract with the bank. From now on, pay me the $500 a month, not the bank.” The obligor is entitled to verification of the assignment.

Effect of Assignment

General rule.

An assignment of rights effectively makes the assignee stand in the shoes of the assignor. He gains all the rights against the obligor that the assignor had, but no more. An obligor who could avoid the assignor’s attempt to enforce the rights could avoid a similar attempt by the assignee. Likewise, under UCC Section 9-318(1), the assignee of an account is subject to all terms of the contract between the debtor and the creditor-assignor. Suppose Dealer sells a car to Buyer on a contract where Buyer is to pay $300 per month and the car is warranted for 50,000 miles. If the car goes on the fritz before then and Dealer won’t fix it, Buyer could fix it for, say, $250 and deduct that $250 from the amount owed Dealer on the next installment (called a setoff). Now, if Dealer assigns the contract to Assignee, Assignee stands in Dealer’s shoes, and Buyer could likewise deduct the $250 from payment to Assignee.

The “shoe rule” does not apply to two types of assignments. First, it is inapplicable to the sale of a negotiable instrument to a holder in due course (covered in detail Chapter 23 "Negotiation of Commercial Paper" ). Second, the rule may be waived: under the UCC and at common law, the obligor may agree in the original contract not to raise defenses against the assignee that could have been raised against the assignor.Uniform Commercial Code, Section 9-206. While a waiver of defenses makes the assignment more marketable from the assignee’s point of view, it is a situation fraught with peril to an obligor, who may sign a contract without understanding the full import of the waiver. Under the waiver rule, for example, a farmer who buys a tractor on credit and discovers later that it does not work would still be required to pay a credit company that purchased the contract; his defense that the merchandise was shoddy would be unavailing (he would, as used to be said, be “having to pay on a dead horse”).

When Assignments Are Not Allowed

The general rule—as previously noted—is that most contract rights are assignable. But there are exceptions. Five of them are noted here.

Material Change in Duties of the Obligor

Several residents in the town of Centerville sign up on an annual basis with the Centerville Times to receive their morning paper. A customer who is moving out of town may assign his right to receive the paper to someone else within the delivery route. As long as the assignee pays for the paper, the assignment is effective; the only relationship the obligor has to the assignee is a routine delivery in exchange for payment. Obligors can consent in the original contract, however, to a subsequent assignment of duties. Here is a clause from the World Team Tennis League contract: “It is mutually agreed that the Club shall have the right to sell, assign, trade and transfer this contract to another Club in the League, and the Player agrees to accept and be bound by such sale, exchange, assignment or transfer and to faithfully perform and carry out his or her obligations under this contract as if it had been entered into by the Player and such other Club.” Consent is not necessary when the contract does not involve a personal relationship.

Assignment of Personal Rights

When it matters to the obligor who receives the benefit of his duty to perform under the contract, then the receipt of the benefit is a personal right that cannot be assigned. For example, a student seeking to earn pocket money during the school year signs up to do research work for a professor she admires and with whom she is friendly. The professor assigns the contract to one of his colleagues with whom the student does not get along. The assignment is ineffective because it matters to the student (the obligor) who the person of the assignee is. An insurance company provides auto insurance covering Mohammed Kareem, a sixty-five-year-old man who drives very carefully. Kareem cannot assign the contract to his seventeen-year-old grandson because it matters to the insurance company who the person of its insured is. Tenants usually cannot assign (sublet) their tenancies without the landlord’s permission because it matters to the landlord who the person of their tenant is. Section 14.4.1 "Nonassignable Rights" , Nassau Hotel Co. v. Barnett & Barse Corp. , is an example of the nonassignability of a personal right.

Assignment Forbidden by Statute or Public Policy

Various federal and state laws prohibit or regulate some contract assignment. The assignment of future wages is regulated by state and federal law to protect people from improvidently denying themselves future income because of immediate present financial difficulties. And even in the absence of statute, public policy might prohibit some assignments.

Contracts That Prohibit Assignment

Assignability of contract rights is useful, and prohibitions against it are not generally favored. Many contracts contain general language that prohibits assignment of rights or of “the contract.” Both the Restatement and UCC Section 2-210(3) declare that in the absence of any contrary circumstances, a provision in the agreement that prohibits assigning “the contract” bars “only the delegation to the assignee of the assignor’s performance.”Restatement (Second) of Contracts, Section 322. In other words, unless the contract specifically prohibits assignment of any of its terms, a party is free to assign anything except his or her own duties.

Even if a contractual provision explicitly prohibits it, a right to damages for breach of the whole contract is assignable under UCC Section 2-210(2) in contracts for goods. Likewise, UCC Section 9-318(4) invalidates any contract provision that prohibits assigning sums already due or to become due. Indeed, in some states, at common law, a clause specifically prohibiting assignment will fail. For example, the buyer and the seller agree to the sale of land and to a provision barring assignment of the rights under the contract. The buyer pays the full price, but the seller refuses to convey. The buyer then assigns to her friend the right to obtain title to the land from the seller. The latter’s objection that the contract precludes such an assignment will fall on deaf ears in some states; the assignment is effective, and the friend may sue for the title.

Future Contracts

Partial Assignments

Successive Assignments

It may happen that an assignor assigns the same interest twice (see Figure 14.2 "Successive Assignments"). With certain exceptions, the first assignee takes precedence over any subsequent assignee. One obvious exception is when the first assignment is ineffective or revocable. A subsequent assignment has the effect of revoking a prior assignment that is ineffective or revocable. Another exception: if in good faith the subsequent assignee gives consideration for the assignment and has no knowledge of the prior assignment, he takes precedence whenever he obtains payment from, performance from, or a judgment against the obligor, or whenever he receives some tangible evidence from the assignor that the right has been assigned (e.g., a bank deposit book or an insurance policy).

Figure 14.2 Successive Assignments

Assignor’s Warranties

An assignor has legal responsibilities in making assignments. He cannot blithely assign the same interests pell-mell and escape liability. Unless the contract explicitly states to the contrary, a person who assigns a right for value makes certain assignor’s warranties to the assignee: that he will not upset the assignment, that he has the right to make it, and that there are no defenses that will defeat it. However, the assignor does not guarantee payment; assignment does not by itself amount to a warranty that the obligor is solvent or will perform as agreed in the original contract. Mrs. Robinson owes Ben fifty dollars. Ben assigns this sum to his friend. Before the friend collects, Ben releases Mrs. Robinson from her obligation. The friend may sue Ben for the fifty dollars. Or again, if Ben represents to his friend that Mrs. Robinson owes him (Ben) fifty dollars and assigns his friend that amount, but in fact Mrs. Robinson does not owe Ben that much, then Ben has breached his assignor’s warranty. The assignor’s warranties may be express or implied.

KEY TAKEAWAY

Generally, it is OK for an obligee to assign the right to receive contractual performance from the obligor to a third party. The effect of the assignment is to make the assignee stand in the shoes of the assignor, taking all the latter’s rights and all the defenses against nonperformance that the obligor might raise against the assignor. But the obligor may agree in advance to waive defenses against the assignee, unless such waiver is prohibited by law.

There are some exceptions to the rule that contract rights are assignable. Some, such as personal rights, are not circumstances where the obligor’s duties would materially change, cases where assignability is forbidden by statute or public policy, or, with some limits, cases where the contract itself prohibits assignment. Partial assignments and successive assignments can happen, and rules govern the resolution of problems arising from them.

When the assignor makes the assignment, that person makes certain warranties, express or implied, to the assignee, basically to the effect that the assignment is good and the assignor knows of no reason why the assignee will not get performance from the obligor.

If Able makes a valid assignment to Baker of his contract to receive monthly rental payments from Tenant, how is Baker’s right different from what Able’s was?
Able made a valid assignment to Baker of his contract to receive monthly purchase payments from Carr, who bought an automobile from Able. The car had a 180-day warranty, but the car malfunctioned within that time. Able had quit the auto business entirely. May Carr withhold payments from Baker to offset the cost of needed repairs?
Assume in the case in Exercise 2 that Baker knew Able was selling defective cars just before his (Able’s) withdrawal from the auto business. How, if at all, does that change Baker’s rights?
Why are leases generally not assignable? Why are insurance contracts not assignable?

14.2 Delegation of Duties

Know what a delegation of duty is.
Recognize how liability remains on the delegator following a delegation.
Understand what duties may not be delegated.

Basic Rules Regarding Delegation

To this point, we have been considering the assignment of the assignor’s rights (usually, though not solely, to money payments). But in every contract, a right connotes a corresponding duty, and these may be delegated. A delegation is the transfer to a third party of the duty to perform under a contract. The one who delegates is the delegator . Because most obligees are also obligors, most assignments of rights will simultaneously carry with them the delegation of duties. Unless public policy or the contract itself bars the delegation, it is legally enforceable.

In most states, at common law, duties must be expressly delegated. Under Uniform Commercial Code (UCC) Section 2-210(4) and in a minority of states at common law (as illustrated in Section 14.4.2 "Assignment Includes Delegation" , Rose v. Vulcan Materials Co. ), an assignment of “the contract” or of “all my rights under the contract” is not only an assignment of rights but also a delegation of duties to be performed; by accepting the assignment, the delegatee (one to whom the delegation is made) implies a promise to perform the duties. (See Figure 14.3 "Delegation of Duties")

Figure 14.3 Delegation of Duties

Effect on Obligor

An obligor who delegates a duty (and becomes a delegator) does not thereby escape liability for performing the duty himself. The obligee of the duty may continue to look to the obligor for performance unless the original contract specifically provides for substitution by delegation. This is a big difference between assignment of contract rights and delegation of contract duties: in the former, the assignor is discharged (absent breach of assignor’s warranties); in the latter, the delegator remains liable. The obligee (again, the one to whom the duty to perform flows) may also, in many cases, look to the delegatee, because the obligee becomes an intended beneficiary of the contract between the obligor and the delegatee, as discussed in Section 14.3 "Third-Party Beneficiaries" . Of course, the obligee may subsequently agree to accept the delegatee and discharge the obligor from any further responsibility for performing the duty. A contract among three persons having this effect is called a novation ; it is a new contract. Fred sells his house to Lisa, who assumes his mortgage. Fred, in other words, has delegated the duty to pay the bank to Lisa. If Lisa defaults, Fred continues to be liable to the bank, unless in the original mortgage agreement a provision specifically permitted any purchaser to be substituted without recourse to Fred, or unless the bank subsequently accepts Lisa and discharges Fred.

Nondelegable Duties

Personal services.

Personal services are not delegable. If the contract is such that the promisee expects the obligor personally to perform the duty, the obligor may not delegate it. Suppose the Catskill Civic Opera Association hires a famous singer to sing in its production of Carmen and the singer delegates the job to her understudy. The delegation is ineffective, and performance by the understudy does not absolve the famous singer of liability for breach.

Many duties may be delegated, however. Indeed, if they could not be delegated, much of the world’s work would not get done. If you hire a construction company and an architect to design and build your house to certain specifications, the contractor may in turn hire individual craftspeople—plumbers, electricians, and the like—to do these specialized jobs, and as long as they are performed to specification, the contract terms will have been met. If you hired an architecture firm, though, you might not be contracting for the specific services of a particular individual in that firm.

Public Policy

Delegations Barred by Contract

The duty to perform a contractual obligation may usually be delegated to a third party. Such delegation, however, does not discharge the delegator, who remains liable on the contract absent a novation.

Some duties may not be delegated: personal services cannot be, and public policy or the contract itself may bar delegation.

What is the difference between an assignment and a delegation?
Under what circumstances is the delegator discharged from liability on the contract?

14.3 Third-Party Beneficiaries

Know what a third-party beneficiary is, and what the types of such beneficiaries are.
Recognize the rights obtained by third-party beneficiaries.
Understand when the public might be a third-party beneficiary of government contracts.

The fundamental issue with third-party beneficiaries gets to this: can a person who is not a party to a contract sue to enforce its terms?

The General Rule

Two Types of Third-Party Beneficiaries

In the vocabulary of the Restatement, a third person whom the parties to the contract intend to benefit is an intended beneficiary —that is, one who is entitled under the law of contracts to assert a right arising from a contract to which he or she is not a party. There are two types of intended beneficiaries.

Creditor Beneficiary

A creditor beneficiary is one to whom the promisor agrees to pay a debt of the promisee. For example, a father is bound by law to support his child. If the child’s uncle (the promisor) contracts with the father (the promisee) to furnish support for the child, the child is a creditor beneficiary and could sue the uncle. Or again, suppose Customer pays Ace Dealer for a new car, and Ace delegates the duty of delivery to Beta Dealer. Ace is now a debtor: he owes Customer something: a car. Customer is a creditor; she is owed something: a car. When Beta performs under his delegated contract with Ace, Beta is discharging the debt Ace owes to Customer. Customer is a creditor beneficiary of Dealers’ contract and could sue either one for nondelivery. She could sue Ace because she made a contract with him, and she could sue Beta because—again—she was intended to benefit from the performance of Dealers’ agreement.

Donee Beneficiary

Modification of the Beneficiary’s Rights

Conferring rights on an intended beneficiary is relatively simple. Whether his rights can be modified or extinguished by subsequent agreement of the promisor and promisee is a more troublesome issue. The general rule is that the beneficiary’s rights may be altered as long as there has been no vesting of rights (the rights have not taken effect). The time at which the beneficiary’s rights vest differs among jurisdictions: some say immediately, some say when the beneficiary assents to the receipt of the contract right, some say the beneficiary’s rights don’t vest until she has detrimentally relied on the right. The Restatement says that unless the contract provides that its terms cannot be changed without the beneficiary’s consent, the parties may change or rescind the benefit unless the beneficiary has sued on the promise, has detrimentally relied, or has assented to the promise at the request of one of the parties.Restatement (Second) of Contracts, Section 311. Some contracts provide that the benefit never vests; for example, standard insurance policies today reserve to the insured the right to substitute beneficiaries, to borrow against the policy, to assign it, and to surrender it for cash.

Government Contracts

The general rule is that members of the public are not intended beneficiaries of contracts made by the government, but only incidental beneficiaries.

What are the two types of intended beneficiaries?
Smith contracted to deliver a truck on behalf of Truck Sales to Byers, who had purchased it from Truck Sales. Smith was entitled to payment by Byers for the delivery. The truck was defective. May Byers withhold payment from Smith to offset the repair costs?
Why is the public not usually considered an intended beneficiary of contracts made by the government?

14.4 Cases

Nonassignable rights.

Nassau Hotel Co. v. Barnett & Barse Corporation

147 N.Y.S. 283 (1914)

McLaughlin, J.

The order appealed from, therefore, is affirmed.

CASE QUESTIONS

The corporation created to operate the hotel was apparently owned and operated by the same two men the plaintiff leased the hotel to in the first place. What objection would the plaintiff have to the corporate entity—actually, of course, a legal fiction—owning and operating the hotel?
The defendants pointed to the clause about the contract inuring to the benefit of the parties “and assigns.” So the defendants assigned the contract. How could that not be allowed by the contract’s own terms?
What is the controlling rule of law upon which the outcome here depends?

Assignment Includes Delegation

Rose v. Vulcan Materials Co.

194 S.E.2d 521 (N.C. 1973)

Huskins, J.

The total of these amounts over and above the prices specified in [the Rose-Dooley contract] is $25,231.57, [about $152,000 in 2010 dollars] and plaintiff seeks to recover said amount in this action.

The rule we adopt and reaffirm here is regarded as the more reasonable view by legal scholars and textwriters. Professor Grismore says:

We further hold that the other party to the original contract may sue the assignee as a third-party beneficiary of his promise of performance which he impliedly makes to his assignor, under the rule above laid down, by accepting the general assignment. Younce v. Lumber Co ., [Citation] (1908), holds that where the assignee makes an express promise of performance to his assignor, the other contracting party may sue him for breach thereof. We see no reason why the same result should not obtain where the assignee breaches his promise of performance implied under the rule of Restatement s 164. ‘That the assignee is liable at the suit of the third party where he expressly assumes and promises to perform delegated duties has already been decided in a few cases (citing Younce). If an express promise will support such an action it is difficult to see why a tacit promise should not have the same effect.’ Grismore, supra. Parenthetically, we note that such is the rule under the Uniform Commercial Code, [2-210].

The decision…is reversed with directions that the case be certified to the Superior Court of Forsyth County for reinstatement of the judgment of the trial court in accordance with this opinion.

Why did Rose need the crushed rock from the quarry he originally leased to Dooley?
What argument did Vulcan make as to why it should not be liable to sell crushed rock to Rose at the price set out in the Rose-Dooley contract?
What rule did the court here announce in deciding that Vulcan was required to sell rock at the price set out in the Rose-Dooley contract? That is, what is the controlling rule of law in this case?

Third party Beneficiaries and Foreseeable Damages

Kornblut v. Chevron Oil Co.

62 A.D.2d 831 (N.Y. 1978)

Hopkins, J.

The plaintiff-respondent has recovered a judgment after a jury trial in the sum of $519,855.98 [about $1.9 million in 2010 dollars] including interest, costs and disbursements, against Chevron Oil Company (Chevron) and Lawrence Ettinger, Inc. (Ettinger) (hereafter collectively referred to as defendants) for damages arising from the death and injuries suffered by Fred Kornblut, her husband. The case went to the jury on the theory that the decedent was the third-party beneficiary of a contract between Chevron and the New York State Thruway Authority and a contract between Chevron and Ettinger.

Plaintiff sued, inter alia , Chevron and Ettinger alleging in her complaint causes of action sounding in negligence and breach of contract. We need not consider the issue of negligence, since the Trial Judge instructed the jury only on the theory of breach of contract, and the plaintiff has recovered damages for wrongful death and the pain and suffering only on that theory.

[Martuscello, J., concurred in the result but opined that the travelling public was not an intended beneficiary of the contract.]

Chevron made two arguments as to why it should not be liable for Mr. Kornblut’s death. What were they?
Obviously, when Chevron made the contract with the New York State Thruway Authority, it did not know Mr. Kornblut was going to be using the highway. How could he, then, be an intended beneficiary of the contract?
Why was Chevron not found liable for Mr. Kornblut’s death when, clearly, had it performed the contract properly, he would not have died?

14.5 Summary and Exercises

The general rule that the promisee may assign any right has some exceptions—for example, when the promisor’s obligation would be materially changed. Of course the contract itself may prohibit assignment, and sometimes statutes preclude it. Knowing how to make the assignment effective and what the consequences of the assignment are on others is worth mastering. When, for example, does the assignee not stand in the assignor’s shoes? When may a future right be assigned?

Duties, as well as rights, may be transferred to third parties. Most rights (promises) contained in contracts have corresponding duties (also expressed as promises). Often when an entire contract is assigned, the duties go with it; the transferee is known, with respect to the duties, as the delegatee. The transferor himself does not necessarily escape the duty, however. Moreover, some duties are nondelegable, such as personal promises and those that public policy require to be carried out by a particular official. Without the ability to assign rights and duties, much of the modern economy would grind to a halt.

The parties to a contract are not necessarily the only people who acquire rights or duties under it. One major category of persons acquiring rights is third-party beneficiaries. Only intended beneficiaries acquire rights under the contract, and these are of two types: creditor and donee beneficiaries. The rules for determining whether rights have been conferred are rather straightforward; determining whether rights can subsequently be modified or extinguished is more troublesome. Generally, as long as the contract does not prohibit change and as long as the beneficiary has not relied on the promise, the change may be made.

The Dayton Country Club offered its members various social activities. Some members were entitled, for additional payment, to use the golf course, a coveted amenity. Golfing memberships could not be transferred except upon death or divorce, and there was a long waiting list in this special category; if a person at the top of the list declined, the next in line was eligible. Golfing membership rules were drawn up by a membership committee. Magness and Redman were golfing members. They declared bankruptcy, and the bankruptcy trustee sought, in order to increase the value of their debtors’ estates, to assume and sell the golfing memberships to members on the waiting list, other club members, or the general public, provided the persons joined the club. The club asserted that under relevant state law, it was “excused from rendering performance to an entity other than the debtor”—that is, it could not be forced to accept strangers as members. Can these memberships be assigned?
Tenant leased premises in Landlord’s shopping center, agreeing in the lease “not to assign, mortgage, pledge, or encumber this lease in whole or in part.” Under the lease, Tenant was entitled to a construction allowance of up to $11,000 after Tenant made improvements for its uses. Prior to the completion of the improvements, Tenant assigned its right to receive the first $8,000 of the construction allowance to Assignee, who, in turn, provided Tenant $8,000 to finance the construction. Assignee notified Landlord of the assignment, but when the construction was complete, Landlord paid Tenant anyway; when Assignee complained, Landlord pointed to the nonassignment clause. Assignee sued Landlord. Who wins? Aldana v. Colonial Palms Plaza, Inc. , 591 So.2d 953 (Fla. Ct. App., 1991).
Marian contracted to sell her restaurant to Billings for $400,000. The contract provided that Billings would pay $100,000 and sign a note for the remainder. Billings sold the restaurant to Alice, who agreed to assume responsibility for the balance due on the note held by Marian. But Alice had difficulties and declared bankruptcy. Is Billings still liable on the note to Marian?

Yellow Cab contracted with the Birmingham Board of Education to transport physically handicapped students. The contract provided, “Yellow Cab will transport the physically handicapped students of the School System…and furnish all necessary vehicles and personnel and will perform all maintenance and make all repairs to the equipment to keep it in a safe and efficient operating condition at all times.”

Yellow Cab subcontracted with Metro Limousine to provide transportation in connection with its contract with the board. Thereafter, Metro purchased two buses from Yellow Cab to use in transporting the students. DuPont, a Metro employee, was injured when the brakes on the bus that he was driving failed, causing the bus to collide with a tree. DuPont sued Yellow Cab, alleging that under its contract with the board, Yellow Cab had a nondelegable duty to properly maintain the bus so as to keep it in a safe operating condition; that that duty flowed to him as an intended third-party beneficiary of the contract; and that Yellow Cab had breached the contract by failing to properly maintain the bus. Who wins? DuPont v. Yellow Cab Co. of Birmingham, Inc. , 565 So.2d 190 (Ala. 1990).

Joan hired Groom to attend to her herd of four horses at her summer place in the high desert. The job was too much for Groom, so he told Tony that he (Groom) would pay Tony, who claimed expertise in caring for horses, to take over the job. Tony neglected the horses in hot weather, and one of them needed veterinarian care for dehydration. Is Groom liable?
Rensselaer Water Company contracted with the city to provide water for business, domestic, and fire-hydrant purposes. While the contract was in effect, a building caught on fire; the fire spread to Plaintiff’s (Moch Co.’s) warehouse, destroying it and its contents. The company knew of the fire but was unable to supply adequate water pressure to put it out. Is the owner of the warehouse able to maintain a claim against the company for the loss?
Rusty told Alice that he’d do the necessary overhaul on her classic car for $5,000 during the month of May, and that when the job was done, she should send the money to his son, Jim, as a graduation present. He confirmed the agreement in writing and sent a copy to Jim. Subsequently, Rusty changed his mind. What right has Jim?
Fox Brothers agreed to convey to Clayton Canfield Lot 23 together with a one-year option to purchase Lot 24 in a subdivision known as Fox Estates. The agreement contained no prohibitions, restrictions, or limitations against assignments. Canfield paid the $20,000 and took title to Lot 23 and the option to Lot 24. Canfield thereafter assigned his option rights in Lot 24 to the Scotts. When the Scotts wanted to exercise the option, Fox Brothers refused to convey the property to them. The Scotts then brought suit for specific performance. Who wins?
Rollins sold Byers, a businessperson, a flatbed truck on a contract; Rollins assigned the contract to Frost, and informed Byers of the assignment. Rollins knew the truck had problems, which he did not reveal to Byers. When the truck needed $3,200 worth of repairs and Rollins couldn’t be found, Byers wanted to deduct that amount from payments owed to Frost, but Frost insisted he had a right to payment. Upon investigation, Byers discovered that four other people in the state had experienced similar situations with Rollins and with Frost as Rollins’s assignee. What recourse has Byers?
Merchants and resort owners in the San Juan Islands in Washington State stocked extra supplies, some perishable, in anticipation of the flood of tourists over Labor Day. They suffered inconvenience and monetary damage due to the union’s Labor Day strike of the state ferry system, in violation of its collective bargaining agreement with the state and of a temporary restraining order. The owners sued the union for damages for lost profits, attorney fees, and costs, claiming the union should be liable for intentional interference with contractual relations (the owners’ relations with their would-be customers). Do the owners have a cause of action?

SELF-TEST QUESTIONS

A creditor beneficiary is

the same as a donee beneficiary
a third-party beneficiary
an incidental beneficiary
none of the above

Assignments are not allowed

for rights that will arise from a future contract
when they will materially change the duties that the obligor must perform
where they are forbidden by public policy
for any of the above

When an assignor assigns the same interest twice,

the subsequent assignee generally takes precedence
the first assignee generally takes precedence
the first assignee always takes precedence
the assignment violates public policy
is an example of delegation of duties
involves using an account receivable as collateral for a loan
involves the purchase of a right to receive income from another
is all of the above

Personal promises

are always delegable
are generally not delegable
are delegable if not prohibited by public policy
are delegable if not barred by the contract

SELF-TEST ANSWERS

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Third-Party Beneficiaries and Contract Interpretation

Posted on: Nov 29 2023

In Stagen v. Neu , 2023 N.Y. Slip Op. 06105 (1st Dept. Nov. 28, 2023) ( here ), the Appellate Division, First Department addressed an issue of contract interpretation involving a word in a settlement agreement that most readers would think has a distinct and undisputed meaning – “employ”. As discussed below, the Court found an issue of fact as to what it means to be “employed” in the context of the record before it.

The Court also touched upon the law surrounding third-party beneficiaries of contracts. As discussed below, the Court found that based upon the prominence of the third-party in the agreement between the parties, the parties intended to make that third-party a beneficiary of the subject agreement.

The plaintiff in Stagen worked as the president of Eden Wood Realty LLC (“Eden”) from April 2017 through October 2022. Plaintiff alleged that in May 2022, defendant entered into a settlement agreement with her father, Richard (“Richard”), in which they both agreed that upon Richard’s retirement, defendant would become president of Eden. The settlement agreement also provided that, until his retirement, Richard had the sole discretion about whether to retain plaintiff as president of Eden and then, if plaintiff remained employed at the time of Richard’s retirement, plaintiff would stay on under the same terms. It also permitted defendant to remove plaintiff if she made a “good faith determination” that plaintiff could no longer perform his duties.

Richard retired in August 2022. In October 2022, defendant terminated plaintiff from his employment at Eden. Plaintiff contended that defendant could not possibly have made a good faith determination about his ability to do the job. Plaintiff sued, asserting a single cause of action for breach of contract.

Defendant moved to dismiss. Defendant insisted that the settlement agreement cited by plaintiff arose after years of litigation with her father and related to other businesses in addition to Eden. Defendant maintained that plaintiff was no longer an employee of Eden as of the date of her father’s retirement and that another entity, Phyllis Cory Consulting Corp. (“Phyllis Consulting”) was actually paying plaintiff to provide services to Eden.

Defendant argued that the provision in the settlement agreement contained a condition precedent—namely that plaintiff remain employed by Eden—at the time of Richard’s retirement. She insisted that because plaintiff was working for Phyllis Consulting, and not Eden, at the time of her father’s retirement, he could not seek relief under the subject provision.

Defendant also contended that the complaint failed to allege that plaintiff was an intended third-party beneficiary of the settlement agreement. Defendant argued that the settlement agreement did not mention Phyllis Consulting and so plaintiff could not seek the benefit of an agreement given that Phyllis Consulting was the entity who paid him.

Plaintiff argued that he stated a cause of action for breach of contract. He claimed the provision that cites him in the settlement agreement ( i.e. , paragraph 6) between defendant and her father specifically conferred him with benefits and entitled him to bring this lawsuit. That provision provided that:

After Richard chooses to retire in his sole and absolute discretion, or dies, Amy shall become the President of Eden Wood. Until that time, the decision whether to continue to employ Stagen by Eden Wood shall be Richard’s alone. Thereafter, and assuming that as of that time Stagen remains employed by Eden Wood, Eden Wood shall continue to employ Stagen on terms no less favorable to Stagen than those in place on the date of Richard’s retirement or death, unless and until Stagen voluntarily retires or Amy makes a good faith determination that Stagen is no longer capable of performing his employment duties competently.

Plaintiff claimed that he was employed by Eden at the time he was fired, and that paragraph 6 of the settlement agreement did not prohibit him from using Phyllis Consulting as an intermediary.

Defendant insisted that Eden paid Phyllis Consulting for plaintiff’s services and so there was no basis to find that plaintiff was working for Eden at the time her father retired, which eviscerated a condition precedent to the agreement. She added that there was no evidence that Phyllis Consulting was the intended beneficiary of the agreement. And she argued that plaintiff was merely acting as an agent of the corporate entity, Phyllis Consulting.

The motion court granted the motion. On appeal, the First Department unanimously reversed, on the law, and the denied the motion.

The Court found that plaintiff was employed by Eden:

In support of her motion to dismiss, Amy contends that plaintiff was not “employed by” Eden Wood on the date of Richard’s retirement because Eden Wood did not pay him at all but instead paid his consulting company. At the time of the Settlement Agreement, plaintiff was president of Eden Wood, and with Richard’s knowledge, he was being paid through the corporation he created. Plaintiff’s position as president and the payment arrangement continued after the Agreement was signed and through the time that Richard retired. Accordingly, notwithstanding this arrangement, plaintiff adequately alleges that he was, and remained for all intents and purposes, an employee of Eden Wood at the time of Richard’s retirement. 1

The Court explained that:

The court’s interpretation of the contract to require any claim to be made by plaintiff’s consulting company, rather than plaintiff individually, would render the words of the agreement meaningless. Under the circumstances, the undefined term “employ” is subject to ambiguity. Accordingly, it is appropriate to examine the facts and circumstances to determine the intent of the parties. Moreover, interpreting the contract as imposing a requirement that plaintiff must be directly employed by Eden Wood as a condition precedent to recovery would elevate form over substance. The Settlement Agreement did not include any language supporting that reading. 2

Finally, regarding the third-party beneficiary claim, the Court held that “the prominent mention of plaintiff in paragraph 6 of the Settlement Agreement evince[d] the contracting parties’ intent to benefit him.” 3 In reaching this conclusion, the Court relied on LaSalle Natl. Bank v. Ernst & Young , 285 A.D.2d 101 (1st Dept. 2001). In LaSalle , the court discussed the law concerning third-party beneficiaries as follows:

In order to claim third-party benefits, the putative third-party beneficiary will be deemed an intended beneficiary if “recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary [not relevant here]; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. * * * An incidental beneficiary * * * is not an intended beneficiary”. A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary, and even then, even if not mentioned as a party to the contract, the parties’ intent to benefit the third party must be apparent from the face of the contract. Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent. 4

Accordingly, the Court concluded that plaintiff was entitled to assert a cause of action for breach of contract as a third-party beneficiary. 5

Slip Op. at *1.
Id. (citations omitted).
Id. at *1-*2 (citation omitted).
LaSalle , 285 A.D.2d at 108-109.
Slip Op. at *2.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

If the Contract/Insurance Policy Doesn’t Say It Specifically, You Might Not Have It

by PMT | Jul 18, 2018 | News

By Marc H. Pillinger .

This is a first for PMT. We have never before reported on two cases together. However, this is a special circumstance as these cases read together are “game changers” when it comes to loss transfer.

Two recent Court of Appeals decisions underscore the primacy of contractual language (or a lack thereof) over appeals to the “reasonable expectations” of a contracting party. The decisions signaled the Court’s faithfulness to principles of contractual interpretation, including the proposition that contracts should not be judicially re-written when their terms are plain and unambiguous. Of course, where the majorities used interpretation to find clarity, the dissents detected ambiguity and/or issues of fact. The dissents also charged the majorities with narrow readings that undermined the intent and expectations of the parties.

The decisions share another important similarity: they are the culmination of litigations involving a complex construction project, contracts, and insurance arrangements, fields that are not shy to conflict but also yearn for the opposite. In view of the foregoing, it is an opportune moment to think comparatively about the Court’s decisions and to assess their impact.

With Whom Have You Bargained?

In Gilbane v. St. Paul Fire [1] , the Dormitory Authority of the State of New York (“DASNY”) contracted with Samson Construction Company (“Samson”) for the construction of a medical laboratory next to Bellevue Hospital. Gilbane Building Company and TDX Construction (“Gilbane JV”), a joint venture, contracted with DASNY to be the project’s construction manager. Crucially, Gilbane JV had no contract with Samson. The DASNY-Samson contract contained a provision requiring Samson to procure general liability insurance, naming DASNY and other entities, including Gilbane JV, as additional insureds under the policy. DASNY sued Samson and Perkins Eastman Architects P.C. (“Perkins”) for allegedly causing damage to neighboring buildings. Perkins impleaded Gilbane JV, who subsequently sought defense and indemnification as an additional insured under Samson’s general liability policy. Samson obtained coverage from Liberty Insurance Underwriters (“the Liberty Policy”). The Liberty Policy contained the following additional insured endorsement:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.” (Emphasis added).

Liberty denied Gilbane JV’s tender. Gilbane JV brought a declaratory judgment action seeking coverage under the Liberty Policy and so began the saga of Gilbane v. St. Paul Fire , a litigation that centers on competing interpretations of the word “with” and the phrase “with whom”.

Liberty argued that (1) the additional insured endorsement is plain and unambiguous ; and (2) a prerequisite for additional insured status under its policy was that the insured, Samson, have a written contract with Gilbane JV.

Gilbane JV argued that (1) the endorsement is ambiguous, thereby requiring that it be construed against the drafter, Liberty; and (2) extrinsic evidence, including the contract and sample certificate of insurance, made it such that Gilbane JV reasonably expected to be afforded coverage under the Liberty policy.

The majority could find no way to dispense with “with.” It found that the endorsement was plain and unambiguous and thus agreed with the “Privity Argument” i.e. that Gilbane JV was not entitled to coverage as an additional insured under the Liberty policy because there was no written contract between Samson and Gilbane JV. Even when analyzed from the vantage of an average insured, “employing common speech [2] ,” the majority found that the word “with” must be doing something in the endorsement: “We cannot ascribed to the position that, whereas “with” has a definite meaning in English, the average insured understands it to have no meaning.”

The more one reads the endorsement, the more it appears, as the dissent puts it, “awkward and unclear.” According to the dissent, the endorsement is subject to divergent but reasonable constructions which rendered it ambiguous. The dissent was swayed by Gilbane JV’s argument that the phrase “by written contract” modifies “to add,” entailing no privity requirement.

As read by the dissent, the endorsement also defies the expectations of upstream parties who are accustomed to a “risk transfer regime” where downstream entities assume the risk of third-party liability. In other words, an upstream party like Gilbane JV would not expect that a downstream party’s additional insured endorsement would require contractual privity . The majority’s response is simple and direct: if parties wish to maintain industry risk-transfer expectations, don’t include a contractual privity requirement in additional insured endorsements – i.e. drop the word “with.”

The Intended and Incidental: Third-Party Beneficiaries

Dormitory Authority v. Samson [3] concerned the same project as Gilbane v. St. Paul Fire. In Dormitory Authority, DASNY and the City of New York sued Samson and Perkins under breach of contract and negligence causes of action, alleging that defendants failed to properly design and install an excavation support system which caused substantial property damage. DASNY and Perkins entered into a contract for Perkins to provide design, architectural, and engineering services for the project. DASNY entered into a separate contract with Samson for the performance of foundation and excavation work. The City alleged that it was a third-party beneficiary under the contracts, and therefore entitled to contractual indemnification.

At the outset, the Court flagged a crucial difference between The DASNY-Perkins and DASNY-Samson contracts: “The contract executed between DASNY and Samson provides that the client – i.e., the City –“is an intended third-party beneficiary of the Contract for the purposes of recovering any damages caused by Samson.” Although there are passing references to the client in the Perkins contract, no analogous language providing that the City is an intended third-party beneficiary appears there.”

The difference between an intended and incidental beneficiary turns on differing recovery rights. Simply put, an intended beneficiary may sue to recover under a contract whereas an incidental beneficiary may not: “It is old law that a third party may sue as a beneficiary on a contract made for his benefit. However, an intent to benefit the third party must be shown, and absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts [4] .”

The Court held that a party’s status as an intended or incidental third-party beneficiary [5] depends on the following:

A third-party is an intended beneficiary if the third-party is the only one who can recover from breach of the contract [6] ; or
A third-party is an intended beneficiary where it is clear from the language of the contract that there was intent to permit enforcement by the third party.” [7]
Generally, to permit third-party enforcement of a construction contract, there must be express contractual language “stating that the contracting parties intended to benefit a third party by permitting that third-party” to enforce the contract. The need for this stringency reflects the fact that construction projects and contracts involve various entities, “with performance ultimately benefitting all of the entities involved.” [8]

While the DASNY-Perkins contract certainly benefitted the City – the Contract involved the construction of a medical laboratory for the Office of the Chief Medical Examiner’s use – neither of the grounds set forth in Fourth Ocean were satisfied: (1) the City was not the only party who could recover under the DASNY-Perkins Contract; and (2) the DASNY-Perkins contract did not expressly name the City as an intended third-party beneficiary. For these reasons, the Court held that the City may not recover as a third-party beneficiary.

Justice Rivera’s dissent noted that the majority’s reliance upon Fourth Ocean was misplaced insofar as it comes “perilously close to requiring that a contract expressly name a nonparty as a third-party beneficiary.” According to the Rivera dissent: where a third-party is “not a stranger to the contract,” in that its relationship with the contracting parties shows that the third-party is an intended beneficiary, then a “functional equivalent of privity” exists – i.e. the third-party may assert a breach of contract claim. [9] The concept of a “functional equivalent of privity” depends upon a case-specific analysis of the parties’ relationship, rather than an in vacuo application of rules. Both the DASNY-Perkins contract and the relationship of DASNY and the City indicated that the City was an intended beneficiary of the project work. As argued by the dissent, at minimum, these indicia [10] should have been sufficient to raise an issue of fact.

Impressions

Dormitory Authority and Gilbane offer important lessons that go beyond construction litigation. First, the Court resisted calls to look beyond the four-corners of the respective insurance policies and contracts. Specifically, the Court refused to look at the extra-contractual context defining the parties’ relationships as a means of defining those parties’ contractual rights. This is not surprising given the limited role of extrinsic evidence in contractual interpretation.

Second, in the case of Gilbane , (1) even with a poorly written endorsement, and (2) where a party made a convincing showing of an alternative reading of the endorsement, a determination of ambiguity is hard to achieve.

Third, the Court offered contracting parties a clear invitation: fashion contracts so that third-party recovery or additional insured status is unequivocal. In the case of Dormitory Authority , this means including unambiguous language identifying a third-party beneficiary and specifying that it has a right to assert a breach of contract claim. With Gilbane , it is imperative to subject additional insured endorsements to careful scrutiny to ensure they accomplish their intended aims.

These cases clearly change what was the “standard in the industry” and the “expectations of the parties.” We suggest that you review your contracts and insurance policies to make sure you have the necessary coverage and contractual protections.

If you have any question, please contact Marc Pillinger and Jeffrey Miller at [email protected] and [email protected] .

[1] Gilbane Bldg. Co./TDX Constr. Corp. v St. Paul Fire and Mar. Ins. Co ., 31 N.Y.3d 131, 135 [2018]

[2] See , Universal Am. Corp. v Natl. Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 [2015]

[3] Dormitory Auth. v Samson Constr. Co. , 30 N.Y.3d 704 [2018]

[4] Port Chester Elec. Const. Co. v Atlas , 40 N.Y.2d 652, 655 [1976]

[5] The Court also cited to the Restatement for a fact pattern that is illustrative and “nearly identical” to relationship of the City, Perkins, and Samson: “19. A contracts to erect a building for C. B then contracts with A to supply lumber needed for the building. C is an incidental beneficiary of B’s promise, and B is an incidental beneficiary of C’s promise to pay A for the building.” Restatement (Second) of Contracts § 302 (1981)

[6] See , Fourth Ocean Putnam Corp. v Interstate Wrecking Co., Inc. , 66 N.Y.2d 38 [1985]

[8] The latter potion of Dormitory Authority v. Samson also addresses the recurring issue of a party’s ability to simultaneously maintain breach of contract and negligence causes of action.

[9] See , City School Dist. of City of Newburgh v Hugh Stubbins & Assoc., Inc. , 85 N.Y.2d 535, 539 [1995]

[10] The dissent points to the following: (1) “the contract expressly states that a city agency will operate the DNA laboratory, and the City retained control over various aspects of the project…”; (2) DASNY is a public benefit corporation whose named governmental client is the City; (3) Perkins was aware of the intended use of the laboratory and the relationship between DASNY and the City.

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COMMENTS

Third Party Beneficiary of a Contract: The Basics
A third-party beneficiary, in the law of contracts, is a person who has the right to sue on a contract, despite not having originally been a party to the contract and/or a signer of the contract. There are two kinds of third-party beneficiaries: an "intentional or intended" beneficiary and an "incidental" beneficiary.
incidental beneficiary
An incidental beneficiary is a term used in contract law to refer to a third party who benefits from a contract between two other parties, but is not intended to benefit. In other words, the contract between the two parties is not made for the purpose of benefiting the third party. Therefore, the third party does not have any legal rights under ...
Third-Party Beneficiary: Meaning and Rights
Third Party Beneficiary: A person who will benefit from a contract made between two other parties. This third party beneficiary was not a party to the contract itself, but if the contract is ...
Chapter 12
Chapter 12 - Third-Party Rights. Learning Objectives. After studying this chapter, you should be able to: Explain how an assignment of contract rights is made and how it operates. Explain how a delegation of duties is made and how it operates. Compare and contrast Intended and Incidental Third-Party Beneficiary Agreements.
Intended Vs. Incidental Third-Party Beneficiary Status
In the absence of explicit language that the parties intended to benefit a third party, New York Courts have articulated that 'the third party is merely an incidental beneficiary with no right to enforce the particular contracts' (Dormitory Authority of the State of NY vs. Samson Construction Co., 30 N.Y.3d 704 (2018) citing Port Chester ...
third-party beneficiary
A third-party beneficiary is a person who is not a contracting party of a contract but can still receive the benefits from the performance of the contract. The privity of the contract is between the contracting parties - the promisor and promisee. A promisor is a party that makes promises to benefit the third-party beneficiary.
12.6: Assignment, Delegation, and Third Party Beneficiaries
Assignment and delegation under a contract should not be confused with rights of third party beneficiaries. A third party beneficiary is someone who is not a party to the contract but stands to benefit from it. Life insurance policies are a classic example of contracts with third party beneficiaries. The insurance company and the insured are ...
Third-Party Contract Beneficiaries: What Did the Parties Intend?
If the answer is "no," the third party is an unintended, "incidental" beneficiary, without contract rights. The promise benefiting a third party to a contract does not have to be for the sole benefit of the third party to confer third-party beneficiary status, as long as it is for the third party's direct or substantial benefit.
10.6: Assignment, Delegation, and Third Party Beneficiaries
Assignment and delegation under a contract should not be confused with rights of third party beneficiaries. A third party beneficiary is someone who is not a party to the contract but stands to benefit from it. Life insurance policies are a classic example of contracts with third party beneficiaries. The insurance company and the insured are ...
14.3: Third-Party Beneficiaries
Two Types of Third-Party Beneficiaries. In the vocabulary of the Restatement, a third person whom the parties to the contract intend to benefit is an intended beneficiary—that is, one who is entitled under the law of contracts to assert a right arising from a contract to which he or she is not a party. There are two types of intended ...
Chapters 17-19 Flashcards
Study with Quizlet and memorize flashcards containing terms like The transfer of a contract right to a third party is known as a(n):, A substitution for an old contract with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party is called a(n) __________., When a contract is intended to profit a third person, such a person is ...
Third Party Beneficiaries and the Restatement (Second) of Contracts
RESTATEMENT (SECOND) OF CONTRACTS A third party beneficiary contract arises when two parties enter into an agreement for the benefit of a third person.1 Traditionally, the requirement of "privity" prevented the third party from enforcing a contract to which he was not a party.2 Gradually, courts eroded this
Third Party Contracts: Everything You Need to Know
The third-party generally has no legal rights in the transaction unless the contract is for their benefit. Third Party Beneficiary. A contract is drawn up and the parties to the contract want a third-party to be able to sue if the contract promise isn't fulfilled. This person is considered a third-party beneficiary.
Chapter 14
Contracts create rights and duties. By an assignment, an obligee (one who has the right to receive a contract benefit) transfers a right to receive a contract benefit owed by the obligor (the one who has a duty to perform) to a third person ; the obligee then becomes an assignor (one who makes an assignment).
Ch 14 Operation of Contracts Flashcards
a person who is not a party to a contract but is intended by the contracting parties to benefit as a consequence of a contract. incidental beneficiary. a person who will benefit as an indirect consequence of a contract, although that was not the intent of the contracting parties. assignment. the transfer of a contract right to a third party who ...
PDF Weekly Information Sheet 08 Contract Rules and Interpretation
the contract may sue. Definitions: Third Party Beneficiary : "A Person who, though not a party to a contract, stands to benefit from the contract's performance." Privity of Contract: "The relationship between the parties to a contract, allowing them to sue each other but preventing an outside third party from doing so."
Third-Party Beneficiaries and Contract Interpretation
* * * An incidental beneficiary * * * is not an intended beneficiary". A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary, and even then, even if not mentioned as a party to the contract, the parties' intent to benefit the third party must be apparent from the face of the contract.
Chapter 17
Chapter 17 - Third Party Rights. Assignment. the transfer of contractual rights to a third party is known as an assignment. PN: transaction where an obligor (assignor) transfers their rights to a third party, the (assignee), as result the assignor's contract rights are extinguished. And the assignee can demand performance due the assignor.
If the Contract/Insurance Policy Doesn't Say It Specifically ...
However, an intent to benefit the third party must be shown, and absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts." The Court held that a party's status as an intended or incidental third-party beneficiary depends on the following:
Chapter 12 Flashcards
A person who gives his obligation under a contract to someone else. Delegatee. A person who receives an obligation under a contract from someone else. Obligee. The person who has an obligation coming to her. Study with Quizlet and memorize flashcards containing terms like Third party beneficiary, Promisor, Promisee and more.
Chapter 14 Flashcards
Select all that apply What are exceptions to the rule that a contract is normally only between two parties? Multiple select question. When rights or duties that arise from a contract are transferred to a third party When the contracts' purpose is to benefit a third party When a contract is an adhesion contract that has been approved by one of the parties
Business Law Quiz #3 Flashcards
A transfer of contract rights to a third party is an assignment. ... If a contract requires that performance be rendered directly to a third party, the third party is an incidental beneficiary. False. If a third party has the right to control the details of contract performance, the third party is an incidental beneficiary.
Business Law Chapter 17 Flashcards
Study with Quizlet and memorize flashcards containing terms like The transfer of a contract right to a third party is known as a(n):, A substitution for an old contract with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party is called a(n) __________., When a contract is intended to profit a third person, such a person is ...